The Accent Group (ASX:AX1) share price just got hit by a broker downgrade

The Accent Group Ltd (ASX: AX1) share price is lagging behind the consumer discretionary sector after it was downgraded by Morgan Stanley.

shoes asx share price represented by white shoes against pink and blue background AX1 share price downgrade

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The Accent Group Ltd (ASX: AX1) share price is lagging behind the consumer discretionary sector after it was downgraded by Morgan Stanley.

The AX1 share price is trading flat at $2.41 during lunch time trade when the sector gained 0.4%.

Big gains by the Premier Investments Limited (ASX: PMV) share price, JB Hi-Fi Limited (ASX: JBH) share price and Harvey Norman Holdings Limited (ASX: HVN) share price is pushing the sector ahead of the S&P/ASX 200 Index (Index:^AXJO).

Time to take profit on the AX1 share price?

The Accent Group share price is probably held back by Morgan Stanley after it urged investors to take profit now.

The broker downgraded the footwear retailer to "equal weight" from "overweight" as it believes Accent's growth momentum is slowing.

"AX1 has executed strongly over the last 12 mths in unusual conditions," said Morgan Stanley.

"Whilst near-term momentum should continue, we think EPS [earnings per share] growth will decelerate from +28% in FY21 to +3%in FY22 as conditions normalize."

Strong trading update fails to inspire

The downgrade follows a bullish trading update by Accent. Management is expecting earnings before interest, tax, depreciation and amortisation growth of around 40% to 45%.

The earnings boost is supported by good top-line growth, cost savings from rent abatements and wage subsidies and accelerating like-for-like store sales growth.

But Morgan Stanley believes all the good news is priced in even as it lifted its 12-month price target on the AX1 share price to $2.60 from $2 a share. The lift in the price target is due to the better-than-expected trading update.

Earnings momentum running out of puff

However, the broker doesn't believe the good times can be sustained – at least not at the same pace. Results in the current financial year will be great due to a "pull-forward" in demand for its shoes.

This refers to consumers rushing to buy sports equipment during the COVID-19 lockdown. This means fewer will need to buy shoes over the next several months.

Also, the subsidies and stimulus during the pandemic will taper off. As the vaccine is rolled out and when consumers start holidaying again, they will be spending less on sports equipment too.

Good news already reflected in the AX1 share price

"AX1' strong momentum is now reflected in the share price, increasing +42% over the last 12 months, meaningfully outperforming the XJO -1%," noted the broker.

"We see limited valuation upside with the stock trading on 18xFY22 P/E or a ~25% premium to the five-year average multiple of 14.5x."

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. The Motley Fool Australia has recommended Accent Group. 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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