Broker tips: Tesco, Amec Foster Wheeler, Unilever
Analysts at JP Morgan Cazenove took a more pessimistic view on Tesco on the heels of data from Kantar Worldpanel which revealed the steamroller that are the discounters continued to roll on.
On the basis of the latest grocery share data from Kantar the broker estimated that Tesco’s like-for-like sales are dropping at a rate of 2.5% and that its like-for-like sales on a two-year basis are not improving.
That indicates the improvement in the company’s trading momentum which started in November has not been sustained and the firm is once again losing market share.
On the other hand, its main rivals, the discounters have been putting in a more consistent performance - particularly in the case of Aldi.
As a result of the above, the broker moved to lower its forecast for the grocer’s UK like-for-like sales for this fiscal year by one percentage point and its estimate for the firm’s trading margins by ten basis points to 1.0%. The latter is partially a result of cost inflation.
Through a sum-of-the-parts (SOP) valuation method JP Morgan now arrives at a target price of 175p, versus 185p beforehand.
Analyst Borja Olcese reiterated his ‘underweight’ recommendation.
Deutsche Bank cut its target on Amec Foster Wheeler to 815p from 830p, noting that its trading update on Tuesday was weak, highlighting further pressure on the top line and margins.
“Despite a diversified structure and ability to lean on cost savings Amec Foster Wheeler is not immune to end-market weakness and current pricing pressure across many markets,” said DB, adding that it expects the margin outlook to deteriorate further with no turnaround likely in 2016.
Commentary that new contracts are being signed at softer pricing terms also suggests that underlying margin pressure will continue in 2016, said Deutsche.
DB cut its 2015 earnings per share estimate by 4.1% to 72.53p from 75.61p.
The brokerage said the key attraction is the yield, which at 4.8% compares favourably with Wood Group on 3.3%. However, it said the yield fairly reflects Amec’s balance sheet flexibility.
DB rates the stock at 'hold'.
Barclays upgraded Unilever to ‘overweight’ from ‘equalweight’ and raised its price target to 3050p from 2850p, as it downgraded German rival Henkel to ‘equalweight’ from ‘overweight’ and raised the price target to €104 from €98.
“The impact of pricing dynamics on local margins in the industry and share price performance year-to-date prompt us to switch from Henkel to Unilever, as Unilever now offers cheaper options on profit growth than Henkel, where the bar is already high in terms of future capital allocation,” said Barclays.
Barclays said it expects Unilever to exceed a core earnings before interest and tax margin of 16% by 2020, driven by refreshments and home care, as well as a gradually improving product mix.
The bank said it now feels that Unilever's valuation and stock performance relative to peers has come back to a healthier level, and that the potential inflection in the home and personal care pricing environment offers some margin or market share upside, with more visibility than earlier this year.
“Our upside case includes a recovery in emerging markets, accompanied by greater operational gearing than we anticipate dropping through to operating profit ,” said Barclays.
At 09:55 BST, Unilever shares were up 1.7% at 2,881p while Henkel was up 0.1% at €108.15.