The Expert View: BP, Diageo and Debenhams
Our daily round-up of analyst recommendations and commentary, featuring Reed Elsevier and Lookers.
Investec backs forecast-beating BP
Stuart Joyner, analyst at Investec, has reiterated his 'buy' recommendation on oil supermajor BP (BP.L) following a quarterly update that came in well ahead of his predictions.
Profit over the quarter came in at $5.17 billion, significantly ahead of Joyner's forecast of $4.02 billion. The dividend has been increased 12.5% to nine cents per share, and is expected to be paid in the fourth quarter. The forecast-beating update comes just days after the group sealed a $27 billion deal to sell its TNK-BP joint venture to Russian state oil company Rosneft.
A higher oil price, good refining margins and record downstream sales due to tight fuel supplies in the US and European markets all helped BP over the quarter.
Bob Dudley, BP's chief executive, said the group is doing a good job of moving on from the 2010 Gulf of Mexico oil spill. ‘BP's performance and the strong progress we are making in transforming the company give us the confidence to increase distributions to our shareholders,' he said.
However, the update also revealed the impact that selling its Russian operations will have on production. Over the quarter TNK-BP accounted for about a million barrels a day of oil - some 31% of the total.
Shares in the group closed at 442.85p on Tuesday, up 17.85p or 4.2%.
Shore Capital urges calm as Diageo's Indian acquisition called into doubt
Phil Carroll, analyst at Shore Capital, still expects drinks giant Diageo (DGE.L) to take a slice of Indian business United Breweries in spite of its owner telling Reuters he is 'under no compulsion whatsoever' to sell a stake to keep his debt-laden airline afloat.
Vijay Mallya's Kingfisher Airlines recently had its operating licence revoked as a result of safety concerns stemming from its precarious financial situation. Mallya said United Breweries generates enough to continue supporting the airline as it has done since April, with about £150 million already injected.
Carroll said investors should take Mallya's comments with a pinch of salt. 'We believe the comments in the press partly reflect some posturing on the part of United Breweries, which clearly do not want to be appear as forced sellers of its stake in United Spirits.'
'From the perspective of Diageo, we expect financial discipline to remain in place and it will keep to its acquisition criteria in assessing the merits of the deal. As to whether a deal will be forthcoming, only time will tell but we suspect the situation that United Breweries finds itself in increases the chances of it happening albeit the comments from the Indian company might lead to a deal for a smaller shareholding rather than a larger interest.'
The market is forecasting a stake sale of 10-25%, Carroll said. The analyst retains his 'buy' recommendation on Diageo.
Shares in the group closed at £17.80 on Tuesday.
JP Morgan lifts target price for indefatigable Debenhams
Gillian Hilditch, analyst at JP Morgan, has increased her target price for Debenhams (DEB.L), saying the department store is still trading at a discount to its rivals in the sector in spite of a bumper year for the shares.
Investors in the group, including Richard Buxton, who manages the Citywire Selection star pick Schroder UK Alpha Plus fund, have been handsomely rewarded with an 80% rise in the value of the shares since the start of the year.
However, Hilditch said there's further to go. 'The stock continues to trade at a 10% discount to peers (2012E and 2013E price to earnings of 11.5x and 10.2x). This is undeserved in our view given group’s online strategy which should drive earnings momentum over the next 12-18 months and that it is well placed to benefit as consumer demand improves.'
Hilditch's target price rises from 120p to 130p, and she reiterated her 'overweight' recommendation.
Read Smart Investor's take on Debenhams, where he considers whether the shares can continue their vertiginous rise.
Shares in the group closed at 119.7p on Tuesday, up 2.1p or 1.79%.
UBS says 'buy' Reed Elsevier
Alastair Reid, analyst at UBS, has reiterated his 'buy' recommendation on business publisher Reed Elsevier (REL.L) ahead of next week's third-quarter update, predicting solid growth.
Having attended an investor day for the group's legal and professional arm Reid said there are signs that previous investments are starting to pay off, and he expects the update to show the same trend across the group as a whole.
Reid expects 4% revenue growth over the first nine months of the year, down from 5% in the first half as a result of the timing of biennial exhibitions.
'The stock has performed relatively well recently, but with a gradual earnings per share (EPS) upgrade cycle likely to continue, scope for cash returns to move from about 4% dividend yield towards 7-8% should buybacks accelerate, and EPS growth moving into double digits, we think it remains cheap on 10-11x 2013 EPS,' he said.
Shares in the group closed at 604.5p on Tuesday, up 1.5p or 0.25%.
Peel Hunt increases target price for Lookers
John Stevenson, analyst at Peel Hunt, has increased his target price for Trafford-based car dealership Lookers (LOOK.L) following a trading update that confirmed a strong end to the year.
In the year to date new car sales are up 11%, which Stevenson noted was pretty much in line with the first half of the year and 9% ahead of the market. Sales of used cars rose 12%, slightly up from the first-half figure.
Although fleet car sales are down 18%, reflecting a big one-off deal made last year, higher margins more than offset this.
Stevenson was impressed by the results, which gave him confidence in the outlook for next year. 'Overall, Lookers is on track to meet full-year forecasts, with 2013E estimates looking increasingly deliverable,' he said.
His target price rises from 80p to 90p, and he reiterated his 'buy' recommendation. Lookers is a corporate client of Peel Hunt.
The shares feature in the Citywire Selection Cazenove UK Smaller Companies fund, run by Citywire A-rated Paul Marriage.
Shares in the group closed at 77.5p on Tuesday, down 0.5p or 0.64%.