Top broker slaps buy rating on Adairs Ltd shares

Thankfully for its long-suffering shareholders, the Adairs Ltd (ASX: ADH) share price is heading in the right direction once again.

In afternoon trade on Tuesday, the home wares and home furnishings retailer’s shares were up over 13% to 98.5 cents.

Why have it shares rocketed higher?

With no news out of the company, the catalyst for this increase appears to be a research note out of Goldman Sachs.

According to the note, analysts at the investment bank have upgraded the retailer from neutral to a buy rating and given its shares a $1.10 price target.

This is based on the belief that the market is undervaluing the company’s core business. Goldman sees its focus on fashion, vertically integrated model, and continued investment in online as being key.

Furthermore, its analysts believe that store rollouts and improvements in like-for-like sales growth will result in earnings growth of 6% in FY 2018 and 10% in FY 2019.

This means its shares are changing hands at a lowly 8x estimated FY 2018 earnings.

Should you invest?

Whilst I’ve not been a fan of the company in the past, if Goldman’s forecasts for a return to earnings growth proves accurate, then Adairs would almost certainly be a great option for investors based on its undemanding price-to-earnings ratio.

But for now I plan to hold off an investment and wait for its full-year results to be announced next month. This should give investors an idea of whether or not the turnaround is coming.

In the meantime, I feel investors may be better off looking at an investment in industry peer Nick Scali Limited (ASX: NCK) instead.

Alternatively, one of these fast-growing shares could be an even better investment idea if you ask me.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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