Broker tips: Ocado, Convatec
With Ocado shares down by a quarter over the past four months, Bank of America Merrill Lynch sees the online grocery specialist as "back in buying territory" and offering supermarkets a "unique" tool to combat Amazon.
Merrill, which kept its price target at 1,020p and double-upgraded the shares to 'buy', was "supportive" of the FTSE 100 group's business model in the UK and feels the four major overseas partnerships in Europe and North America "demonstrate that Ocado's unique full online solution is a credible and profitable alternative to Amazon's threat in a growing market".
Ahead of a crucial three years where it must demonstrate the economics of its partnership model, the opening on time of Ocado's fourth 'customer fulfilment centre' in Erith, south-east London, gave analysts confidence of management's ability to deliver on time.
Noting that management had flagged other "opportunities" at interim results, the analysts said this implied potential for another earnings stream, but they were "unsure of the outcome and how big the potential profit could be but it implies another source of revenue for a foreseeable future notch not priced in".
JPMorgan downgraded medical equipment maker Convatec to 'neutral' from 'overweight' and cut the price target to 183p from 280p on Tuesday following the company's profit warning a day earlier and the announcement of its chief executive's departure.
Convatec issued its second profit warning in 12 months on Monday, revising down full-year guidance mostly due to a change in the inventory policy of a key customer of its Infusion Devices business, but also because of weakness in the other divisions, notably Wound Care.
"A second profit warning in 12 months, uncertainty around 2019 guidance, as well as further management change is likely to further dent investor sentiment, with limited catalysts in our view in the near to medium term," said JPM.
It said that while the equity story is clear - defensive growth and improving margins - what has lacked in the two years since IPO has been consistent execution.
Convatec cut its overall 2018 organic growth guidance to between 0% and 1% from a previous range of between 2.5% and 3%. Management quantified the impact to organic growth as 130 basis points the Infusion Devices arm, 40-45bps from Wound Care and the balance of the cut from the other two divisions.
"Management commentary through summer (and even on pre-close calls) had been positive, however sales numbers across the franchises disappointed (despite soft comps, notably in Ostomy and Wound Care). With management upheaval and a business seemingly without oversight on sales and growth, we can understand the share price reaction yesterday."