Barclays Downgrades Vestis Corp (VSTS) to Underweight 'mostly due to lack of belief on the 2028 targets'

Barclays analyst Manav Patnaik downgraded Vestis Corp (NYSE: VSTS) from Equalweight to Underweight with a price target of $19.00 (from $17.00).

The analyst comments "Following IBP’s 4Q earnings and conference call, we reduce our rating to Neutral from Overweight, as we believe valuation fully reflects our outlook for a stable to constructive macro and housing backdrop this year, as well as the company’s recent solid execution. Moreover, we point to the stock’s strong outperformance over the last two and a half months - up 42% since Dec. 13, which has led our building products universe (up 13% on average ex-IBP; S&P: +8%) - as well as its meaningful multiple expansion, now trading at roughly 14x our 2024E EBITDA, up from roughly 10x at the time of our upgrade to Overweight in mid-December. Regarding 2024, IBP expects growth to be led by single-family residential, largely driven by the national production builders, while despite expecting multi-family starts down nearly 15% in 2024, the company anticipates sales growth in this end market as well, as it pointed to still having “extremely strong” backlogs as well as continued confidence in taking market share. On price/mix, IBP pointed to its historical annual pace of improving at a low to mid-single digit rate against a benign inflationary backdrop. Regarding profitability, the company feels confident in being at the high end of its long-term gross margin range of 30-32% (2023: 33.5%), driven by margin improvement in its multi-family and commercial businesses, which it believes is sustainable, and despite a potentially negative impact from stronger growth by the production builders; incremental EBITDA margins are also expected to remain at the top end of the company’s long-term targeted 20-25% range in 2024. Finally, regarding 4Q results, total and organic sales rose 5% and 2%, respectively, above our +1% and -2% estimates, driven by lower volumes, while adjusted operating margins of 15.8% were up 80 bps YOY but below our 16.3%E, led by higher SG&A. We modestly lower our 2024E and 2025E adjusted EBITDA to $530 million and $580 million, respectively, from $542 million and $592 million following 4Q results and the company’s 2024 commentary. However, we increase our Dec. 2024 price target to $242 from of $199, which is now based on a roughly 13x target EV/EBITDA multiple against our 2024E EBITDA (previously 10.5x). We believe our target multiple, at a modest discount to where the stock is currently trading against our 2024E EBITDA but roughly two turns above its 5-year average, appropriately reflects our outlook for a more stable and we believe constructive macro and housing backdrop over the next year, the company’s solid margin expansion over the last several years (which we believe is largely sustainable) and its ongoing M&A strategy. Lastly, we rate IBP Neutral, as we believe its valuation, while somewhat expensive relative to BLD - currently trading at roughly 14x and 13x our 2024E and 2025E EBITDA, respectively, vs. BLD at roughly 12x and 11.5x - also reflects the company’s positive fundamental attributes relative to BLD, including its larger growth opportunity in the residential installation market and higher ROE, as well as the company’s recent solid execution and positive market outlook."

For an analyst ratings summary and ratings history on Vestis Corp click here. For more ratings news on Vestis Corp click here.

Shares of Vestis Corp closed at $19.51 yesterday.

You May Also Be Interested In

• Oppenheimer Downgrades Legend Biotech Corp. (LEGN) to Perform, 'CEO/Partnership/Competition Overhangs to Cap Upside'
• Barclays Downgrades ACV Auctions Inc (ACVA) to Underweight
• Quantinuum Inc (QNT) PT Raised to $95 at Bernstein SocGen Group