The Expert View: Vodafone, French Connection and Fenner

Our daily round-up of analyst recommendations and commentary, featuring Vodafone, French Connection, Fenner, JD Wetherspoon and Rio Tinto.

Key stats
Market capitalisation	£78,652m
No. of shares out	49,181m
No. of shares floating	49,059m
No. of common shareholders	not stated
No. of employees	86373
Trading volume (10 day avg.)	90m
Turnover	£46,417m
Profit before tax	£6,957m
Earnings per share	13.65p
Cashflow per share	29.17p
Cash per share	17.04p

*Correct as at 16 Jan 2013

Deutsche Bank downgrades Vodafone on growth fears

Free cash flow, dividend per share and organic revenue growth are all set to fall at Vodafone (VOD.L) over the coming year, warns Deutsche Bank analyst David Wright, who has dropped his recommendation from 'buy' to 'hold'.

Wright expects organic service revenue growth to decline through 2013, with positive growth 'very unlikely' until next year. Earnings growth should just about stay positive, he said, but only because of its US outfit Verizon Wireless and share buybacks.

'Risks to the upside include general macro recovery beyond expectations, an increase in VZW distribution and/or any move to acquire VOD’s stake,' Wright said. 'To the downside macros risks are equally applicable, while VOD could be forced into mergers and acquisition to compete in an increasingly converged sector.' His target price drops from 225p to 175p.

Shares in the group closed at 160p on Wednesday, down 2.7p or 1.6%.

Key stats
Market capitalisation	£26m
No. of shares out	96m
No. of shares floating	44m
No. of common shareholders	not stated
No. of employees	2558
Trading volume (10 day avg.)	0m
Turnover	£215m
Profit before tax	£5m
Earnings per share	4.66p
Cashflow per share	7.55p
Cash per share	35.66p

*Correct as at 16 Jan 2013

French Connection profit warning leaves turnaround in doubt

Yesterday's profit warning from clothing retailer French Connection (FCON.L) raises some tough questions about its new strategy, Seymour Pierce Kate Calvert has said.

In an unscheduled trading update French Connection warned that it now expects to lose £7.5 million, well ahead of consensus estimates. Calvert had pencilled in a £4.5 million loss.

'The profit warning is due, we believe, to weaker than expected sales in the UK, possibly lower margins than forecast even though the company delayed its Sale pre-Christmas by a week, and disappointing wholesale orders for Spring/Summer,' Calvert said.

'There must now be question marks over the company’s strategy, which was unveiled in September. It now looks likely that it will be at least two years before results break-even.'

The analyst retains her 'hold' recommendation for now, but her target price falls from 25p to 20p.

Shares in the group closed at 27.3p on Wednesday, down 2.3p or 7.6%.

Key stats
Market capitalisation	£768m
No. of shares out	194m
No. of shares floating	189m
No. of common shareholders	not stated
No. of employees	4970
Trading volume (10 day avg.)	1m
Turnover	£831m
Profit before tax	£59m
Earnings per share	30.16p
Cashflow per share	48.28p
Cash per share	56.20p

*Correct as at 16 Jan 2013

FinnCap downgrades Fenner to 'hold'

Falling demand from Australian miners looks set to have a knock-on effect on conveyor-belt maker Fenner (FENR.L), according to FinnCap analyst David Buxton, prompting him to downgrade the shares from 'buy' to 'hold'.

Yesterday's interim management statement points to trading being in line with expectations outlined at its November results, but weaker demand from Australian miners has Buxton worried.

'We are reducing forecasts to reflect slightly weaker conditions than we expected, with a move from a pre-tax profits of £108.5 million to £98.0 million, with earnings per share moving from 38.1p to 34.3p, being almost a 10% reduction,' he said.

'Overall we are favourably disposed to the group, but with some mixed markets and some degree of demand uncertainty we feel that our new forecasts indicate that the group’s P/E rating of 11.5x for the current year appears fair, with lacklustre sentiment expected in the short term. We therefore reduce our rating from buy to hold.'

Shares in the group closed at 397 on Wednesday, up 3.9p or 1%.

Key stats
Market capitalisation	£655m
No. of shares out	126m
No. of shares floating	91m
No. of common shareholders	not stated
No. of employees	14403
Trading volume (10 day avg.)	0m
Turnover	£1,197m
Profit before tax	£45m
Earnings per share	35.63p
Cashflow per share	74.68p
Cash per share	22.25p

*Correct as at 16 Jan 2013

JD Wetherspoon's margins squeezed

Strong sales are being undermined by falling margins at ubiquitous pubco JD Wetherspoon (JDW.L), Shore Capital analyst Greg Johnson has warned, and he expects downgrades ahead.

In the 11 weeks to 13 January like-for-like sales were up 8%, a further acceleration from the exceptionally strong and Olympic aided 7.1% in the previous quarter.

But cost inflation, particularly in food, is taking its toll on operating margins. The profit margin over the first half is expected to be about 8.2%, 110 basis points down on the previous year and 40 basis points below the first quarter, suggesting a reduction to just 7.8% in the second quarter.

'Based on today’s update, we estimate first-half pre-tax profit forecast of about £34.0-34.5 million, a £1-1.5 million fall on the prior year,' Johnson said.

'The scale of the downgrade is clearly dependent on the margin outlook, although we note the comparatives get materially tougher as the year progresses. We have a Hold stance on JD Wetherspoon, noting better margin stories elsewhere in the sub-sector.'

Shares in the group closed at 518.5p on Wednesday, down 13.5p or 2.5%.

Key stats
Market capitalisation	£63,940m
No. of shares out	1,847m
No. of shares floating	1,661m
No. of common shareholders	not stated
No. of employees	67930
Trading volume (10 day avg.)	4m
Turnover	37,657m USD
Profit before tax	3,630m USD
Earnings per share	1.88 USD
Cashflow per share	3.40 USD
Cash per share	3.41 USD

*Correct as at 16 Jan 2013

Rio Tinto still a 'buy', UBS says

Mining giant Rio Tinto (RIO.L) is still a 'buy', according to UBS analyst Myles Allsop, even though copper production missed guidance last year.

Production of the metal was 3% below guidance for the 2012 financial year even though some of Rio's key mines performed better. Iron ore production, meanwhile, exceeded expectations, while coal production was as expected.

'Reconciling for Q4 production resulted in a minor -0.6% decline to our forecast 2012 earnings, with lower coking coal and copper volumes partially offset by better than expected ferrous oxide volume,' Allsop said.

'We see cost cuts as the key driver to watch in 2013 as commodity price expectations moderate and with production expectations largely well known to the market.'

Shares in the group closed at £34.50 on Wednesday, down 39p or 1.1%.