The Expert View: Pearson, Rightmove and Serco
Our daily roundup of analysts' share recommendations and commentary, also including Staffline and British American Tobacco.
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.’
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.
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.’
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.
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.