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The Expert View: Tesco, Schroders and Next

The Expert View: Tesco, Schroders and Next

Schroders upgraded as ‘Buxton headwind’ fades

Schroders (SDRt.L) is recovering from the departure of fund manager Richard Buxton, while boasting a strong balance sheet and fast projected earnings per share growth, said Barclays analysts as they upgraded the stock to ‘overweight’.

Buxton, previously Schroders’ head of UK equities and manager of the UK Alpha Fund, announced his departure from the firm in March, spurring outflows from the fund.

‘We believe the overall trend is of the fund being down to a stable core size with further net redemptions likely to be minimal’, the Barclays analysts said. ‘In addition, Schroders management highlight they have seen compensating strong inflows into Cazenove’s UK Opportunities fund, run by Julie Dean.’

Overall, they explained: ‘We rate Schroders OW due to its improving flow momentum now that the Buxton headwind is receding. The manager has attractive equity market gearing, with a impressive international distribution franchise and strong balance sheet.’

Alongside the upgrade from ‘underweight’, the analysts raised their target price to £30.10.

The Barclays team is ‘positive overall’ on the sector thanks to ‘improving flow momentum, Equity bias and attractive valuations,’ with Aberdeen (ADN.L) and Hargreaves Lansdown (HRGV.L) ‘key overweights’ alongside Schroders.

Schroders shares rose 1.1% on Friday, to close at £26.36.

Next wins over City with bumper Christmas

Next (NXT.L) won a pair of new ‘buy’ ratings on Friday after the high street clothing retailer reported bumper Christmas sales and a special dividend.

Both Nomura and Cantor Fitzgerald upgraded Next shares to ‘buy’ after the group reported an 11.9% rise in Christmas sales, upped its profit forecast and announced a special dividend of 50p per share.

‘The stock, in our view, is well supported by its superior returns, prospects and the strength of its on-line business when one considers the valuation the market puts on pure play retailers’, commented Cantor analyst Freddie George.

Nomura’s Frazer Ramzan said this: ‘In our view, Next’s strong delivery stems from its high hurdle rate (2 year cash payback, 15% net branch contribution), sensible planning assumptions and cost discipline, which have led it to its favoured position of 37% online sales participation and marketing leverage through its directory and credit offer. This combination is likely to continue to deliver.’

Both analysts expect the shares to rise to £65.00. The shares shot up 10% on Friday to £60.85.

Arrow’s ‘superior returns’ are sustainable

Analysts remain confident in the prospects for Arrow Global (ARWA.L), the debt recovery company that takes on portfolios of debtors at discounted prices and tracks them down.

Numis’s James Hamilton said the company was ‘on target’ after a pre-close trading update confirming that trading was in line with expectations for 2013 with a ‘strong pipeline of portfolio acquisition opportunities ahead’.

Hamilton, who rates the recently-listed company as ‘add’ (half way between hold and buy), pointed to Arrow’s unique skill set in a ‘competitive, cyclical industry’.

‘Key to Arrow's superior return is its ability to enhance the number of paying customers from the portfolios it acquires. Arrow typically enhances the number of paying customers by 50% after the vendors and a number of DCAs have already worked hard to collect on these accounts.

‘We believe the data and analytical skills of Arrow are very hard to replicate and consequently make the group's superior returns sustainable.’

Canaccord Genuity’s Robin Savage maintained his ‘buy’ recommendation on the shares.

Arrow fell 0.6% on Friday, to close at 260p.

‘Buy’ into a Tesco turn-around

Shareholders can expect more bad news from Tesco (TSCO.L) when it provides an update on Christmas trading this Thursday – but after a rough year things could be looking up for the supermarket giant.

Retail analysts at Jefferies are among a slim majority of City scribblers who say ‘buy’ the shares after four consecutive years of declines.

Tesco, fighting to turn around its fortunes after a profit warning in January 2012, has been losing shoppers. It has invested £1 billion to turn around its UK business.

Though it will have had a ‘challenged’ Christmas, with group sales falling 1.5%, ‘we believe relative trading performance is improving in the UK and international LFL challenges are now past their worst,’ say the Jefferies team.

The market is still assuming the worst: ‘At current valuation levels investors price in the tough UK conditions but assume limited chances of a turn-around domestically or internationally,’ the analysts note.

Tesco shares rose 0.1% to 330p on Friday.

Rio to suffer from iron ore price decline

Anticipating a sharp decline in the price of iron ore this year, analysts at S&P Capital IQ, say investors should sell Rio Tinto (RIO.L) shares.

Analyst Johnson Imode’s negative take on Rio clashes with the growing positive sentiment towards the shares after 2013’s poor performance.

He expects a 19% decline in the price of iron ore, Rio’s primary money-spinner. ‘Altogether, with China’s December iron ore stocks at their highest since October 2012, we see few positive catalysts for iron ore in 2014 post potential Q1 support from weather and the Chinese New Year.’

Imode expects the shares to drop to £27.00 from Friday's closing price of £33.70, flat on the day.

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