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The Expert View: Vodafone and Diageo ratings chopped
Our daily round-up of analyst recommendations and commentary on stocks in the news, also featuring Smith & Nephew and SuperGroup.
by Chris Marshall on Nov 29, 2012 at 07:01
Worsening service revenue, mobile spectrum cost challenges and analyst downgrades mean Vodafone faces a ‘tough near-term outlook’, according to analysts at Berenberg.
After a tough first half of Vodafone’s financial year, Paul Marsch and Laura Janssens have subsequently downgraded their rating on the shares to ‘hold’.
But it wasn’t an easy decision, they say, providing a list of reasons why they could be wrong. ‘But we have to face the fact that since the end of 2011, convincing new catalysts for Vodafone shares’ outperformance have been hard to find.’
‘Our view that Vodafone shares could continue to outperform despite lacking catalysts, driven largely by the idea that most alternative investments in the sector were relatively unappealing, has proven over-optimistic.’
Investors and analysts did not look kindly on Smith & Nephew yesterday after the artificial hip and knee maker splashed $782 million (£488 million) on a cash bid for Healthpoint of the US.
Shares dropped as the deal was deemed as potentially expensive and a move into riskier business areas. Martin Brunninger at Nomura remained cautious on the shares, keeping his ‘neutral’ rating.
‘While this deal could be more value enhancing by assuming both success of its development projects and cross selling the portfolio outside the US, we remain cautious based on regulatory risk, execution risk and price pressure in this business,’ noted Brunninger
‘Without the ability to cross-sell to other regions it may be challenging to sustain mid-teens top-line growth over the medium term, which would challenge value creation significantly,’ he added.
Smith & Nephew’s chief executive Olivier Bohuon said the deal was ‘an important step’ because it strengthened the company's position in advanced wound care, one of the fastest growing areas of its business.
Something has to give, says Investec analyst Martin Deboo, ‘time for a breather on Spirits, we think.’
Deboo has downgraded both Diageo and competitor Pernod Ricard, a French company, from 'buy' to 'neutral' after steep share price rises for the two drinks companies.
Shares in Diageo and Pernod are up by 66% and 49% respectively since an August 2011 inflexion point, but now, ‘with both stocks now screening at fair value on our proprietary valuation model (relative to a discount a year ago) we think the fundamentals now argue for caution as we head into the new investing year,’ says Deboo.
Deboo has cut his target price from 1940p to 1970p.
Better value can now be found elsewhere, the analyst adds: ‘We retain a neutral to positive stance on the broader consumer space, and have recently upgraded both the UK Tobaccos and Tate & Lyle from Hold to Buy.’
It used to be a fund manager darling, then it lost its way, and now again the City is warming to SuperGroup, the owner of pseudo-Japanese fashion brand Superdry.
Seymour Pierce’s Kate Calvert and Freddie George say the share price does not reflect the greater confidence in the company – which has seen a string of high-level resignations starting with co-founder Theo Karpathios – and its business opportunities.
Repeating their ‘buy’ recommendation and 750p price target, they say: ‘The stock is now rated at a c.15% discount to the General Retail sector, having declined by almost 10% in the last month and is, in our view, undervalued considering future growth and the operational gearing in the earnings.’
The number of hold and sell recommendations on Supergroup shares among City analysts still narrowly outweighs those saying the shares are a ‘buy’.
SuperGroup is due to announce its interim results on December 12th with Seymour Pierce forecasting a 13% rise in pre-tax profits to £14.7m from £13.0m in the previous year.