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The Expert View: Tesco, Imperial Brands and Balfour Beatty

Our daily roundup of analyst commentary on shares, also including Pearson and Auto Trader.

by Michelle McGagh on Sep 29, 2017 at 05:00

If you would like to receive news alerts on any of the stocks mentioned in The Expert View, click on the star icons below to add them to your favourites.
Key stats
Market capitalisation£15,196m
No. of shares out8,189m
No. of shares floating8,042m
No. of common shareholdersnot stated
No. of employees464520
Trading volume (10 day avg.)26m
Profit before tax£72m
Earnings per share0.88p
Cashflow per share16.70p
Cash per share83.57p

Jefferies ‘upbeat’ about Tesco interims

Jefferies is expecting interim results from Tesco (TSCO) to be on track but there are still concerns about how quickly the supermarket giant can build its margins over the longer term.

Analyst James Grzinic retained his ‘hold’ recommendation and increased his target price from 180p to 185p ahead of interims next Wednesday. The shares were flat at 185p yesterday.

‘We expect upbeat interims from Tesco, with improved cash generation, good second quarter UK like-for-like delivery and a reiteration of the 3.5% to 4% margin ambition all likely features,’ he said.

‘Less helpfully, we anticipate contained first-half UK margin gains in the context of the longer-term group target. This and a likely slowing UK momentum to come, could cap the catch-up trade.’

He added that Tesco needed to build its margin and ‘investors may be willing to buy into the major build required in future margins to deliver against the more upbeat end of market expectations’.

However, he said to build the margin significantly ‘would require a major step-up in operational expenditure savings delivery and industry relative like-for-like outperformance’.

Key stats
Market capitalisation£30,155m
No. of shares out956m
No. of shares floating950m
No. of common shareholdersnot stated
No. of employees33900
Trading volume (10 day avg.)3m
Profit before tax£631m
Earnings per share65.96p
Cashflow per share196.09p
Cash per share132.89p

Imperial Brands still offers attractive return, says Hargreaves

Imperial Brands (IMB) may be facing a tough environment but Hargreaves Lansdown believes the tobacco company’s cashflow will mean it can deliver an ‘attractive’ total return over the longer term.

The company yesterday reported it was on track to meet earnings expectations this year but cautioned it faced a ‘particularly challenging industry environment’. The shares fell 4.1% to £31.67 on the news.

Charlie Huggins holds the shares in his HL Select UK Income Shares fund and said the focus on a smaller number of quality brands was ‘paying off’ for Imperial.

‘By simplifying the brand portfolio, Imperial is able to cut costs and channel more investment behind its strongest brands,’ he said. ‘This investment has led to a stronger second half performance.’

But Huggins acknowledged the pressures on tobacco stocks, after US regulators announced plans to limit the amount of nicotine allowed in cigarettes.

‘These uncertainties have seen the shares weaken over recent months, meaning they now trade on a price/earnings of just 12x and offer a yield of over 5%, growing at 10% per annum,’ said Huggins.

‘While we acknowledge the various uncertainties, the current valuation combined with the strength of Imperial’s cashflows, gives us confidence in the group’s ability to deliver an attractive total return over the medium to longer term.’

Key stats
Market capitalisation£1,861m
No. of shares out690m
No. of shares floating687m
No. of common shareholdersnot stated
No. of employees21829
Trading volume (10 day avg.)2m
Profit before tax£2m
Earnings per share0.29p
Cashflow per share7.75p
Cash per share111.45p

Peel Hunt upgrades Balfour Beatty: ‘material outperformance’ on the way

Peel Hunt has upgraded Balfour Beatty (BALF) as it believes the shares have underperformed despite the investment case for the construction company being ‘de-risked’.

Analyst Andrew Nussey upgraded his recommendation from ‘add’ to ‘buy’ and increased the target price from 300p to 340p. The shares jumped 5.5% to 270p yesterday.

‘Balfour Beatty’s management team has materially de-risked the investment case, yet the shares have underperformed - albeit in a sector that is out of favour,’ he said.

‘Our analysis suggests that medium-term earnings expectations are looking undemanding given the operational progress, beneficial mix shift and robust market backdrop.’

He added that there was also ‘hidden value’ within infrastructure investments and a ‘strengthening balance sheet suggests scope for enhanced shareholder returns over the medium term’.

‘We believe the shares look set for material outperformance - you may now remove your hard hat.’

Key stats
Market capitalisation£4,957m
No. of shares out823m
No. of shares floating813m
No. of common shareholdersnot stated
No. of employees32719
Trading volume (10 day avg.)3m
Profit before tax£-2,337m
Earnings per share-286.82p
Cashflow per share-241.90p
Cash per share180.38p

Ignore ‘false hope’ at Pearson, says Liberum

Beleaguered educational publisher Pearson (PSON) saw its shares rise on the back of a note suggesting the third quarter could be more positive but Liberum has cautioned against investors holding out ‘false hope’.

Analyst Ian Whittaker reiterated his ‘sell’ recommendation and target price of 330p on the stock, which rose 2% to 602p yesterday.

‘Pearson’s shares were boosted by a positive broker note suggesting that its third quarter trading update might provide a more positive outlook on its crucial US higher education business,’ he said.

‘We struggle to see how the outlook would have turned more positive. Commentary from other industry players, some as recent as three weeks ago, suggest the market trends were still tough and that there had been no improvement.’

Key stats
Market capitalisation£3,791m
No. of shares out965m
No. of shares floating913m
No. of common shareholdersnot stated
No. of employees824
Trading volume (10 day avg.)5m
Profit before tax£155m
Earnings per share15.60p
Cashflow per share16.40p
Cash per share0.82p

Fears around Auto Trader are ‘overdone’, says Barclays

Car classifieds website Auto Trader (AUTOA) may have seen some volatility lately but Barclays thinks the concerns are overdone.

Analyst Andrew Ross reiterated his ‘overweight’ recommendation and target price of 465p on the shares, which rose 1.6% to 393.4p yesterday.

He upgraded the stock to ‘overweight’ in June but said it has ‘recently been a volatile performer’, which he attributed to fears of cyclical exposure and dealer consolidation, higher costs, a weakening car market, and news of Amazon’s involvement in the market.

‘But the key reasons we are constructive on this name have not changed,’ said Ross. ‘We continue to see investor concerns about the impact of a weakening end market as overdone, and we see headwinds from consolidation as very manageable.’

He believes that Auto Trader ‘looks set to beat consensus estimates this year’.

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Look up the shares

  • Tesco PLC (TSCO.L)
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  • Imperial Brands PLC (IMB.L)
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  • Balfour Beatty PLC (BALF.L)
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  • Pearson PLC (PSON.L)
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  • Auto Trader Group PLC (AUTOA.L)
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