Here is your Pro Recap of the top takeaways from Wall Street analysts for the past week: upgrades for Margeta and Deciphera Pharma, and downgrades at Southwest Airlines, FibroGen, and Stanley Black & Decker.
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Southwest Airlines a sell at Redburn
What happened? On Monday, Redburn downgraded Southwest Airlines (NYSE:LUV) to Sell with a $27 price target.
What’s the full story? Redburn is lowering its earnings estimates for Southwest as the airline faces lower revenue and higher costs in the third quarter of 2023. Redburn also doubts that Southwest can improve its top line or margins next year, given the oversupply and competition in the U.S. domestic market, where Southwest plans to expand its capacity by more than 8%.
The analysts say they believe "unit revenues will continue to face downward pressure, which is not expected by consensus. Couple this with the company trading above through-cycle P/E, and we see downside risk."
Southwest hopes to boost its profitability by $500 million by optimizing its network and focusing on leisure routes, but Redburn is skeptical about this strategy, as new routes take time to mature and face increased competition from other airlines, in particular the ultra-low-cost carriers.
Southwest already faces more direct competition on its routes than it did in 2019: 62% of its capacity is on routes where it has at least one competitor, compared with 58% in 2019, according to the analyst. Frontier (NASDAQ:ULCC) and Spirit (NYSE:SAVE) are the two airlines that overlap most with Southwest’s network.
Sell at Redburn means, "Redburn argues that the stock price will be lower over one year."
How did the stock react? LUV equity dropped continuously following the early-morning headline, with shares trading down 1% to $32.36 by 7AM in New York. Southwest ended the day 0.7% higher to $32.97 in the wake of broader market bullish sentiment.
FibroGen Inc. cut to Underperform at BofA
What happened? On Tuesday, Bank of America downgraded FibroGen (NYSE:NASDAQ:FGEN) to Underperform with a $2 price target.
What’s the full story? BofA cut FibroGen to Underperform citing a lack of positive catalysts and a risk of generic competition for its anemia drug roxadustat in China. The analysts are lowering the price target to $2 per share, reflecting a discount to the company's cash balance of about $360M.
BofA also expects the company’s upcoming data for pamrevlumab in Duchenne muscular dystrophy and pancreatic cancer to be “disappointing,” and does not include them in its valuation. BofA assumes that roxadustat will lose patent protection in China in 2026, based on previous unfavorable rulings, but acknowledges that there is uncertainty around the timing of generic entry. The analysts are also factoring in the company’s cost-reduction program, which aims to save $100M-$120M annually from 2024 onward.
The downgrade showed up on the heels of an earnings miss on Monday night.
Underperform at Bank of America means “Underperform stocks are the least attractive stocks in a coverage.”
How did the stock react? Shares hammered down from $1.81 to $1.73 on the premarket headline, a drop over roughly 1.7%, as automated scalpers jumped ahead of slower order flow. FibroGen ended Tuesday’s session hanging by a thread at $1.44, down about 18.7%.
Marqeta Inc. gets a Buy rating at Berenberg
What happened? On Wednesday, Berenberg upgraded Marqeta Inc (NASDAQ:MQ) to Buy with an $8 price target.
What’s the full story? Berenberg upgraded its rating on MQ to Buy (from Hold) and raised its price target to $8, based on a valuation of 8x its estimated 2024 gross profit of $342.1M. The upgrade comes after MQ resolved the uncertainty around its Cash App contract, which allows it to focus on growing its gross profit from a new base level.
Berenberg highlighted MQ’s strong performance in the embedded finance segment, where it offers customized card solutions for non-financial companies through its APIs.
The analyst also noted that MQ is expanding its international presence, with about 40% of its net new customer bookings in the second quarter coming from outside the U.S. Berenberg cited MQ’s recent partnership with Brazil’s Fitbank (Private) as an example of its potential to tap into the 40 markets where its platform is enabled
Buy at Berenberg means: “Sustainable upside potential of more than 15% to the current share price within 12 months.”
How did the stock react? Shares remained elevated following the company’s earnings report Tuesday after the close. The equity traded a handful of one-thousand lots at $6:24 around $5.79. MQ opened the regular session at $5.97, and closed at $5.54, for a gain of 11.7%.
Deciphera Pharma upped to Buy at Stifel
What happened? On Wednesday after the close, Stifel upgraded Deciphera Pharmaceuticals (NASDAQ:DCPH) to Buy with a $20 price target.
What’s the full story? Stifel analysts upgraded DCPH to Buy, citing improved competitive prospects for Qinlock, its second-line treatment for gastrointestinal stromal tumors (2L GIST), potential commercial expansion with vimseltinib (a drug for treatment of tenosynovial giant cell tumor, or TGCT), and long-term upside from possible label extensions. Stifel had previously doubted Qinlock’s ability to compete with the Theseus Pharma's (NASDAQ:THRX) pan-KIT approach in the 2L exon 11+17/18 GIST market, but with the discontinuation of that program, they now see Qinlock as a viable alternative to sunitinib-based therapies.
The analysts also expect vimseltinib to show a favorable profile in phase 3 and to capture most of the market share, although they remain more conservative than management’s $500M U.S. sales target. Stifel has updated its model to include 2L exon 11+17/18 GIST sales, and now projects risk-adjusted peak sales of around $570M from four distinct opportunities.
Buy at Stifel means “We expect a total return of greater than 10% over the next 12 months with total return equal to the percentage price change plus dividend yield.”
How did the equity react? Shares spiked as InvestingPro pushed the headline first at 4:33PM from $13.72 to $14.09, trading nearly 1,000 lots. To start Thursday’s regular session, shares traded $14.50 and closed at $15.32, gaining 11.5% overall vs. Wednesday's close (also a day after an impressive earnings beat).
Stanley Black & Decker slashed to Underperform at Wolfe
What happened? On Friday, Wolfe downgraded Stanley Black & Decker (NYSE:SWK) to Underperform with a $94 price target.
What’s the full story? The analyst says the downgrade is mainly based on valuation, as the stock has been driven by optimism about the new housing market recovery.
Wolfe Research observes that balance sheet leverage is expected to stay high as free cash flow generation is mostly used for the company's dividend payout. The analyst does not expect management to cut the dividend, but expects this to be an important investor debate. Wolfe also expects most of the industrial asset sales to be used for debt reduction.
The analyst views SWK's share valuation as challenging at current levels. Further, Wolfe notes that if management can execute fully on its $2 billion cost reduction plan, then SWK could achieve 2025 earnings per share of $7 to $8, which could support a share valuation in the $120-to-$130 range.
However, the analyst also says it is equally possible that demand fundamentals and margin offsets could limit 2025 EPS to $4-$5 (vs. ~$1 in 2023e). The analyst’s bear/bull spread of $61-$124 and base case of $94 suggest a negative risk/reward and drive the downgrade to an Underperform rating.
Underperform at Wolfe means: “The security is projected to underperform analyst's industry coverage universe over the next 12 months.”
How did the stock react? Shares slid just after 5:30AM when the note circulated, dropping from $95.37 to $93.92. SWK opened Friday’s regular session at $93.65 and clawed back some value to close at $94.30, losing just over 1% on the entire session.
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