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Zacks senior retail sector analyst Robert Plaza, CFA has surprised the investor community by recently upgrading the shares of home decor firm Kirkland's, Inc. (KIRK) from a Hold to Buy despite poor financial results of the company. Here are some of the reasons why:
'We are upgrading Kirkland's from a Hold to Buy. Given slower consumer spending, continued weakness in the home furnishings market, and the company's poor fundamentals, an upgrade of KIRK is clearly a contrarian call.
'With the stock down 75% in the last twelve months and trading at around $1, the worst-case scenario -- going out of business -- is more than priced in. More to the point, we think that outcome is unlikely. In our view, a more probable outcome is that Kirkland's is acquired by a private equity firm in a deal similar to competitor Restoration Hardware (RSTO).
'We think a deal for Kirkland's would come at a discount to the RSTO deal. Still, if Kirkland's were to get acquired at book value, it would fetch $2.60 per share. That's 160% above its current print. We are forecasting Kirkland's to generate losses in 2007 and 2008. Thus, its stock does not have a price-to-earnings multiple. However, it does trade at a discount to its industry peers using other relative valuation ratios such as price-to-book, price-to-sales, and price-to-cash flow.
'In our opinion, this valuation is appropriate given the company's weak performance and low visibility for future quarters. Our six-month target price is $2.00, which assumes that the stock will track the overall market for the next six months. In our opinion this is just the right time to invest on the stock.'
Read the full analyst report on KIRK.
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