On Tuesday, Morgan Stanley (NYSE:MS) resumed coverage on Soho House & Co Inc. (NYSE: SHCO) stock, assigning an Equalweight rating and setting a price target of $5.50. The firm highlighted the company's financial and operational leverage as significant factors influencing the risk-reward balance for the share price.
The analysis pointed out that Soho House's lease-adjusted debt is approximately 5.8 times its expected 2024 earnings before interest, taxes, depreciation, amortization, and rent costs (EBITDAR). This figure is notably higher than the average of around 3.5 times EBITDAR for the firm's coverage universe.
Additionally, general and administrative expenses (G&A) are about half of the company's EBITDA plus G&A, compared to a coverage average of roughly 20%. Depreciation and amortization (D&A) costs are also high, making up about 70% of EBITDA, whereas the average capital expenditures (capex) for peers stand at approximately 25% of EBITDA.
The firm also mentioned that while Soho House's membership fees could provide some revenue stability, the company's high fixed costs could significantly impact earnings if there are even minor fluctuations in in-house and other revenues.
Current market conditions, with negative trends observed across the restaurant and leisure sectors, compound this sensitivity, prompting a cautious stance on the company's fundamentals.
Morgan Stanley's projections for Soho House's EBITDA fall below the consensus for the years 2024 and 2025. Despite this, the firm acknowledges that Soho House's EBITDA is expected to grow at a compound annual growth rate (CAGR) of 22% through 2026, which outpaces its peers.
However, it is important to note that this growth comes with higher leverage. At present, Soho House's shares are trading at 18 times the next twelve months' estimated value to EBITDA (NTM EV/EBITDA), which is above the core peer set valuation.
In other recent news, Soho House & Co reported a wider-than-expected Q2 loss, with a net deficit of $33.9 million or $0.17 per share, surpassing analyst expectations of a $0.11 per share loss.
However, the company's revenue exceeded estimates, reaching $305.1 million, a 5.6% increase year-over-year, and slightly above the consensus estimate of $302.85 million. Membership growth remained robust, seeing a 6.6% increase YoY to 264,540, with Soho House members specifically growing 16% YoY to 204,028.
These recent developments also include a 16.1% rise in membership revenues to $103.6 million, which made up 33.9% of total revenues. In-House revenues, encompassing food and beverage, accommodation, and spa offerings, slightly increased to $128.4 million. The company's adjusted EBITDA also experienced a rise, reaching $33.3 million from $31.8 million in Q2 2023.
For the full fiscal year 2024, Soho House & Co maintained its revenue guidance of $1.2-1.25 billion, aligning with analyst expectations of $1.22 billion. The company has also upgraded its outlook for total Soho House members, now expecting over 212,000 members, up from its previous guidance of over 210,000.
InvestingPro Insights
Recent metrics from InvestingPro provide a nuanced view of Soho House & Co Inc. (NYSE: SHCO). With a market capitalization of $1.23 billion, the company's financial health and stock performance have been under scrutiny. An impressive gross profit margin of 61.85% over the last twelve months as of Q2 2024 stands out, indicating a strong ability to control costs relative to revenue. However, the company's short-term obligations exceeding liquid assets and the anticipation of unprofitability this year by analysts add layers of concern for potential investors.
On the performance front, SHCO has experienced a strong return over the last month, with a 35.56% increase, and over the last three months, with a 24.31% increase. Yet, it's worth noting that the company does not pay dividends, which could be a factor for income-focused investors. Additionally, with a current price below the fair value estimates by analysts at $7.5 and InvestingPro's fair value at $5.32, the stock presents a mixed picture for value assessment.
InvestingPro Tips further highlight that SHCO is trading at a high EBITDA valuation multiple, which aligns with Morgan Stanley's observation of the stock trading at a premium compared to peers. Investors considering a position in Soho House & Co should be aware of these factors and may find additional insights by exploring the full list of 8 InvestingPro Tips available at https://www.investing.com/pro/SHCO.
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