Michaels' shares paint a pretty picture

The stock rises 9% after the company reveals strong second-quarter results.

By MSN Money Partner Aug 27, 2014 4:31PM
Credit: © Tim Boyle/Getty Images

Caption: A Michaels store in Mount Prospect, Ill.By Tomi Kilgore, MarketWatch

Maybe Michaels Companies (MIK) just went public two months too early.


The arts-and-crafts retailer's shares got off to a rather disappointing start as they debuted on June 27, a time when the retail sector was struggling to deal with a penny-pinching consumer


The shares closed below the initial-public-offering price of $17 on just their third-day of trading. Analysts said relatively high debt levels were also a concern.


But after strong fiscal second-quarter results Wednesday, the stock has started catching up to the pack. It ran up more than 9 percent in afternoon trade Wednesday to within 3 ercent of its IPO price.


Good timing, because the environment for retail shares has improved significantly over the last few weeks. After a difficult July and early August amid some disappointing profit reports, the SPDR S&P Retail exchange-traded fund (XRT) has now rallied 6.6 percent month to date, compared with a 3.6 percent gain in the Standard & Poor's 500 Index ($INX) and is on track to close at an all-time high.


Meanwhile, Michaels shares are up more than 10 percent this month.


Even with Wednesday's rally, analysts view the stock as relatively cheap. It was trading at roughly 10 times next year’s profit expectations, according to FactSet, or well below the valuation of its closest peers at about 14 times to 15 times earnings projections, according to Credit Suisse analyst Gary Balter.


The average investment rating on the shares is "overweight," according to FactSet, and the average price target is $18.85, which is 15 percent above current levels.


Chief Financial Officer Charles Sonsteby said on a conference call that the company will use excess free cash flow to pay down debt, preferably the highest-cost debt first, over the medium term.


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