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The Expert View: Direct Line, Prudential and Greggs

Our daily round-up of analyst recommendations and commentary, featuring Mothercare and Diageo.

Our daily round-up of analyst recommendations and commentary, featuring Direct Line, Prudential, Greggs, Mothercare and Diageo.

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Key stats
Market capitalisation£2,893m
No. of shares out1,500m
No. of shares floating450m
No. of common shareholdersnot stated
No. of employees15309
Trading volume (10 day avg.)55m
Profit before tax£249m
Earnings per share16.60p
Cashflow per share18.70p
Cash per share91.99p

*Correct as at 18 Oct 2012

Oriel warns Direct Line shares set to fall

Marcus Barnard, analyst at Oriel, has initiated coverage of newly spun off car insurance firm Direct Line (DLG.L) with a 'reduce' recommendation, warning the shares are likely to drop as former owner Royal Bank of Scotland disposes of its majority shareholding.

Barnard's initiation of coverage follows a meeting with the management, which he said provided a useful insight into the business model. 'We were impressed with the openness of the presentation, particularly in relation to segments where the business is not delivering and management’s desire to improve the operational performance,' he said.

The presentation highlighted a number of initiatives to improve performance, including changes to pricing, claims and distribution, as well as expansion of the commercial and international divisions, Barnard said.

However, with RBS still holding almost 70% of the shares and being forced to sell these before the end of 2014, Barnard expects the shares to head south. 'We therefore discount our valuation to 175p as a medium term price target,' he said.

Shares in the group closed at 192p on Thursday, down 1p or 0.52%.

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Key stats
Market capitalisation£22,148m
No. of shares out2,557m
No. of shares floating2,539m
No. of common shareholdersnot stated
No. of employees25414
Trading volume (10 day avg.)4m
Profit before tax£1,415m
Earnings per share55.75p
Cashflow per share-9,999,999.00p
Cash per share284.81p

*Correct as at 18 Oct 2012

Bernstein sees Prudential shares hitting £10

Edward Houghton, analyst at Bernstein Research, has reiterated his 'outperform' recommendation on financial services group Prudential (PRU.L), saying the shares justify their premium valuation.

Prudential has outperformed the FTSE 350 Life Index by 30% since 2008, Houghton noted, and it's one of the best performing UK life insurers in the year so far. He praised its combination of capital strength, strong cash generation and earnings growth, saying Prudential is the only UK company in its sector to offer all three.

Looking ahead, Houghton said a flotation of its US division looked a possibility, with at least some of the proceeds invested in Asia. However, this remains some way off, he said.

With this in mind, Houghton expects Prudential's share price to reach £10, but said he 'can't (yet) see how it can get beyond it'. 'We'd like to see Prudential setting out how it intends to create further substantive shareholder value beyond FY13,' he concluded.

Shares in the group closed at 864p on Thursday, up 2p or 0.23%.

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Key stats
Market capitalisation£492m
No. of shares out101m
No. of shares floating88m
No. of common shareholdersnot stated
No. of employees19504
Trading volume (10 day avg.)0m
Profit before tax£45m
Earnings per share44.29p
Cashflow per share75.00p
Cash per share19.78p

*Correct as at 18 Oct 2012

Canaccord downgrades Greggs, says 'step change' needed to halt decline

Wayne Brown, analyst at Canaccord, has downgraded Greggs (GRG.L) from 'hold' to 'sell', warning that limited pricing power and rising imput costs mean the ubiquitous bakery chain is set to struggle.

Year-to-date sales are down 2.6% on a like-for-like (LFL) basis, Brown said, a decline from a rise of just 0.6% in the same period a year ago. 'Combined with increasing input costs, we see downside pressure to an already less than 8% operating margin,' Brown added.

The analyst warned that although Greggs is making use of its cash reserves to target new markets, widen its product range and increase the rate of refurbishments, it may be too little, too late. 'For us to turn positive we need to see a step change to both the rate of shop closures and refurbishments delivering an improvement in core trading,' he said.

Rival high-street food sellers JD Wetherspoon, Marstons and Restaurant Group are all managing like-for-like rises in sales, Brown said, suggesting Greggs' woes may be company specific.

Shares in the group closed at 485.5p on Thursday, down 0.75p or 0.15%.

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Key stats
Market capitalisation£232m
No. of shares out89m
No. of shares floating86m
No. of common shareholdersnot stated
No. of employees4350
Trading volume (10 day avg.)0m
Profit before tax£-92m
Earnings per share-105.28p
Cashflow per share-79.13p
Cash per share2.03p

*Correct as at 18 Oct 2012

Seymour Pierce sticks at 'sell' on Mothercare

Freddie George, analyst at Seymour Pierce, has reiterated his 'sell' recommendation on Mothercare (MTC.L) despite stronger UK sales, saying the clothing retailer is still fighting for relevance with a generation of mums used to the convenience of Amazon and the supermarkets.

The second-quarter update showed like-for-like UK sales up 0.3%, beating expectations, although total sales were down 7.5%, reflecting store closures. George noted that the introduction of a new range of clothing designed by Jools Oliver (wife of TV chef Jamie Oliver) will have lifted sales.

International sales were up 10.8%, just shy of the 11% analysts had pencilled in. The Asia Pacific region, the Middle East and Africa performed at the top end of expectations, but Europe remained a drag, the company said.

Overall, the results did little to change George's view of a company struggling to reach out to younger customers: 'We do not believe Mothercare is an easy fix and brand repositions tend to take longer than expected. It will be difficult to make Mothercare relevant again for the modern mother as it has strong competition from Amazon and the supermarkets. We maintain our Sell recommendation for the time being but will review our price target of 145p.'

Investors, however, were more impressed by the latest set of results. Shares in the group closed at 258p on Thursday, up 24.75p or 10.65%.

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Key stats
Market capitalisation£43,943m
No. of shares out2,509m
No. of shares floating2,492m
No. of common shareholdersnot stated
No. of employees27483
Trading volume (10 day avg.)4m
Profit before tax£1,953m
Earnings per share77.84p
Cashflow per share97.05p
Cash per share42.94p

*Correct as at 18 Oct 2012

JP Morgan warns over Diageo's weak Asian presence

Matthew Webb, analyst at JP Morgan, has warned Diageo (DGE.L) investors that lacklustre sales volumes in Asia highlight the drinks maker's weakness in this fast-growing market.

First-quarter group sales were up 5% year-on-year, which was in line with consensus estimates, although slightly shy of Webb's 6% forecast. However, sales in Asia rose just 2%, well below the analyst's forecast of 9%.

Diageo said the disappointing figure was a result of ongoing poor trading in South Korea, phasing of sales in duty free, and weak vodka sales in India. Webb said all three of these factors are Diageo-specific, so he's not worried about any potential read-across to rivals Pernod-Ricard or Remy.

'We believe that today's weak performance from Diageo's Asian business is a reminder that it does not share the high level of exposure to the most attractive Asian markets (China and India) enjoyed by Pernod-Ricard, which remains our preferred pick amongst the large-cap spirits stocks,' he said.

Webb reiterated his 'underweight' recommendation on the shares.

Shares in the group closed at £17.56 on Thursday, down 12p or 0.68%.

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