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The Expert View: Pearson, Rightmove and Serco

Our daily roundup of analysts' share recommendations and commentary, also including Staffline and British American Tobacco.

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Key stats
Market capitalisation£8,284m
No. of shares out819m
No. of shares floating803m
No. of common shareholdersnot stated
No. of employees42980
Trading volume (10 day avg.)2m
Profit before tax£268m
Earnings per share33.27p
Cashflow per share72.99p
Cash per share132.35p

*Correct as at 28 Feb 2014

Pearson: don’t believe the bounceback story

Structural pressures are accelerating for Pearson (PSON.L), warns Liberum analyst Ian Whittaker, who doesn’t ‘believe in the 2015 bounceback story’.

Whittaker was among analysts who recoiled at another profits warning from the publisher and owner of the Financial Times.

Pearson told shareholders that it expected earnings to fall next year, alongside the news of a 21% decline in adjusted operating profit in 2013 to £736 million.

The business has struggled amid restructuring costs and weak demand for higher education in the US market. ‘We reiterate as our Key Sell in media - structural pressures are accelerating, particularly in North American higher education, which is core area of concern,’ Whittaker said.

‘We do not believe in the 2015 bounceback story as we do not believe in a recovery in US higher education revenues nor that Common Core will provide a boost.’

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Key stats
Market capitalisation£2,774m
No. of shares out100m
No. of shares floating96m
No. of common shareholdersnot stated
No. of employees325
Trading volume (10 day avg.)0m
Profit before tax£63m
Earnings per share59.24p
Cashflow per share60.26p
Cash per share6.85p

*Correct as at 28 Feb 2014

Rightmove: back to buy for Numis

Booming website traffic, rising revenues, an optimist outlook for 2014 and a small dividend increase were among reasons cited by Numis analyst Gareth Davies as he slapped a ‘buy’ recommendation on property portal Rightmove (RMV.L).

The company reported a 17% rise in 2013 revenues to £139.9 million, alongside a 27% rise in website traffic, and increased its final dividend to 17p.

Alongside the upgrade from ‘add’ to ‘buy’, Davies raised his target price to £33.60 from £32.70 (shares were trading up 5% at £27.57 on Friday morning).

‘Rightmove has reported a good set of 2013 results that came in ahead of our expectations,’ he said.

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Key stats
Market capitalisation£2,172m
No. of shares out499m
No. of shares floating484m
No. of common shareholdersnot stated
No. of employees96113
Trading volume (10 day avg.)1m
Profit before tax£245m
Earnings per share48.78p
Cashflow per share68.20p
Cash per share28.65p

*Correct as at 28 Feb 2014

Aggreko’s loss is Serco’s gain

'Back the man, as well as the business', said Robin Speakman, analyst at Shore Capital, evoking the old investment adage as Serco (SRP.L)’s appointment of Rupert Soames as chief executive encouraged the analyst to upgrade the outsourcing company to ‘hold’.

Soames is to join from temporary power provider Aggreko. He’ll have a lot on his plate, said analysts including Speakman, who had previously rated the shares as a ‘sell’.

‘We still believe that Serco faces many challenges across its sprawling business platform, the greatest of these perhaps being its reputation. Step in Mr Soames’.

‘Time will tell if he is the right man for the job operationally, but we believe that Serco's reputation with clients and decision makers has just gone up two notches on the dial from zero…Mr Soames will be a very busy man for the next few years.’

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Key stats
Market capitalisation£169m
No. of shares out23m
No. of shares floating20m
No. of common shareholdersnot stated
No. of employees652
Trading volume (10 day avg.)0m
Profit before tax£7m
Earnings per share33.10p
Cashflow per share41.00p
Cash per share54.55p

*Correct as at 28 Feb 2014

Staffline: excellent investment case

Staffline (STAF.L) can continue its track record of ‘over-delivery’ against consensus City forecasts, said Finncap analyst Guy Hewett as he rated the stock a ‘buy’.

Staffline – an AIM-listed provider of recruitment services – has aggressive growth aspirations, noted Hewett, which ‘suggest that 95% share price upside, a 5% dividend yield, acquisitions and/or a return of cash to shareholders are all possible within the next two to three years’.

‘Our forecasts assume less aggressive progress but still evidence an excellent investment case. The actual outcome may well fall between the two scenarios, and we hence expect upgrades to continue the group's track record of over-delivery against consensus.’

Hewett has a target price of 870p for the stock, compared with Friday morning’s price of 730p.

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Key stats
Market capitalisation£61,200m
No. of shares out1,887m
No. of shares floating1,789m
No. of common shareholdersnot stated
No. of employees87485
Trading volume (10 day avg.)4m
Profit before tax£3,797m
Earnings per share194.82p
Cashflow per share233.50p
Cash per share109.15p

*Correct as at 28 Feb 2014

British American Tobacco: core income stock

The world’s largest cigarette maker, British American Tobacco (BATS.L), is a ‘core holding for long-term income-oriented investors’, said Charles Stanley analyst Tina Cook as she upgraded the stock to an ‘accumulate’ rating.

Her upgrade from ‘hold’ comes after the company announced 2013 results including a 3% rise in operating profits, helped by exceeding all of its financial targets in all of its four regions.

‘We expect full year results to reassure that British American Tobacco can continue to deliver attractive underlying growth despite headwinds in Europe and emerging markets,’ said Cook.

The stock benefits from ‘well-recognised defensive characteristics, emerging market leadership, cost savings to deliver further margin improvement, and attractive shareholder returns underpinned by robust cash generation,’ she added.

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