Medium term
/
Buy
Trade view / 20 April 2017 at 9:15 GMT

Has Pandora's jewelry turned dull? — #SaxoStrats

Head of Equity Strategy / Saxo Bank
Denmark
Instrument: PNDORA:xcse
Price target: 850
Market price: 715.50
k Background

It's been a rough period since May last year for Pandora, the world's largest jewelry-maker and 11th most valued company in the Textiles Apparel & Luxury segment, with the share price down 29% as investors begin to question the growth potential. In recent sessions the stock has been under pressure due to downgrades among sell-side firms.

With stock being high on our quant model's conviction list we are taking advantage of recent developments recommending buying the shares. What makes this stock attractive?

On all the fundamental metrics in our equity radar model it scores high. The value factor is 0.51 standard deviation better than the industry based on trailing fundamentals so in terms of valuation the stock is attractive.

It also scores above average on yield meaning that Pandora is returning more capital to shareholders than peers in the same industry. Even more importantly Pandora scores very high (2.66) on the quality factor as the company's business model makes it the company with the highest return on invested capital in its industry.

But a factor that has catapulted the stock high on the conviction list is the reversal factor (3.06). This is because the stock price has fallen a lot the past month compared to the industry. Historically this is followed by a mean reversion as the price behaviour among its peers suggests investors are overreacting on Pandora.

Equity Radar - Conviction List
Equity Radar
Source: Saxo Bank Quantitative Strategies 

Pandora has seen impressive revenue growth rates since late 2011 following a series of events that led to profit warnings. 12-month trailing revenue has just crossed DKK 20 billion ($2.89 billion) with analysts looking for 16% revenue growth in FY17 and 13% in FY18.

Pandora revenue growth
 
Revenue growth quarter-on-quarter has slowed recently due to softer revenues in the Americas, but in Q4, Europe and Asia-Pacific helped offset the Americas weakness. Even if the current trajectory is too optimistic and is revised down during the year, the valuation is now so attractive that we believe long-term investors find current levels attractive even against any mild negative surprises. 

Pandora revenue growth (2)



















The biggest catalyst for growth over the coming five years is Asia-Pacific and that is still only 20% of the overall business. We would not be surprised to see Europe begin slowing down while Americas picking up again driven by increased penetration in South America.

But the big growth driver will be Asia-Pacific. Any disappointment in this segment could cause a significant re-pricing of the company's future outlook. 

Pandora revenue geo split



















Pandora is currently valued at 10.9 on trailing EV/EBITDA which is the lowest since early 2013 and given the return on capital profile and EBITDA margins close to 40% we believe Pandora is an attractive growth stock in Europe.

Management and risk description

Pandora's shares are very volatile so we are setting a conservative stop price at DKK 660. The company's reaffirmation of its 2017 outlook is very encouraging but still want to keep risk low on this trade and also to have a meaning risk-reward ratio.

The next big event is the Q1 earnings release on May 9.

Pandora weekly share price
Pandora weekly share price
Source: Saxo Bank 

Parameters

Entry: we are entering the stock with a buy market order at current levels DKK 710-725.

Stop: the stop is set at DDK 660 which is just below the closing price April 18. Given the stock is so volatile we are being conservative on this recommendation.

Target: we are setting the short-term target to DKK 850.

Time horizon: Given the tight stop and target price we expect the time horizon on this trade to be medium unless the company disappoints materially during 2017.

— Edited by Martin O'Rourke

Non-independent investment research disclaimer applies. Read more
A compiled overview of Trade Views provided on TradingFloor.com is found here
2y
DMLeong DMLeong
Hi Peter, any update of your Outlook for Pandora going forward after the Stop Loss was hit?
2y
Peter Garnry Peter Garnry
No, we are in wait and see mode until Q2 earnings...

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