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The Expert View: Imperial Tobacco, Rio Tinto and Thomas Cook
A roundup of some of the best analyst commentary on shares, also including Pearson and Capital & Regional.
Our daily round-up of analyst recommendations and commentary, featuring Imperial Tobacco, Rio Tinto, Thomas Cook, Pearson and Capital & Regional.
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Imperial Tobacco misses expectations
Imperial Tobacco (IMT.L) shares still look attractively valued, according to Berenberg Bank, but sales volumes need to improve.
The broker's comments followed yesterday's interim management statement, which showed underlying stick equivalent volumes down 7% over the first three quarters, worse than the 6% decline Berenberg Bank analyst Erik Bloomquist had forecast.
Cost savings and rising prices in many parts of Europe should mean IMT's profits for the year hit expectations, Bloomquist said, but he warned that earnings per share (EPS) targets may prove hard to meet.
'We are concerned, however, that delivering operating profit near consensus estimates for F2013 or F2014 may come at the expense of necessary reinvestment into the business,' he said, reiterating his 'hold' recommendation.
'Without substantial end market improvement, we believe there is a risk that IMT may need to put its EPS growth targets on hold for a year in order to fund sufficient brand reinvestment, as it continues its strategic change.'
Shares in the group closed at £22.07 on Thursday, up 53p or 2.5%.
Rio Tinto cost-cutting starts to pay off
Rio Tinto (RIO.L)’s cost-cutting efforts are yielding results faster than expected, says Canaccord Genuity analyst Peter Mallin-Jones, who as a result has raised his target price for the mining company’s shares.
‘We are increasing our estimates for Rio Tinto after strong evidence from the 1H results that the cost cutting drive launched by Sam Walsh is starting to lift margins and, more crucially, is impacting faster than we anticipated,’ said Mallin-Jones, labelling Rio a ‘buy’ amid a rally in mining sector shares over the past month.
He hiked his price target for the shares to £40.00 from £39.50, concluding that the current share price of £31.00 priced in a collapse in iron ore prices.
‘The increases to our estimates come from the much improved margins delivered by the Aluminium and Energy units as we roll through a faster impact of the cost cutting actions of management.’
Investors can also look forward to bigger dividend payments, rising by an average of 13 cents a year, according to the analyst.
Shares in the group closed at £31.03 on Thursday, down 91p or 2.8%.
Thomas Cook set for 'second wave' of savings
A 'second wave' of cost savings could see Thomas Cook (TCG.L) rise further in the months ahead, according to Jefferies.
Analyst Ian Rennardson said the travel industry as a whole is in a better state than it has been for some years, with solid demand and the challenge from online travel agencies better understood.
However, cost savings will remain the focus, he said: 'We think share prices are more likely to be driven by self-help initiatives and news on cost savings than by news on trading.'
The first wave of cost savings was recently raised to £400 million by 2015, and the management is now talking about a second, smaller wave of more structural savings.
'These incremental savings include the distribution cost benefits of achieving its 50%+ web penetration and more sharing of services between businesses,' Rennardson said, reiterating his 'buy' recommendation, and increasing his target price from 155p to 200p.
Shares in the group closed at 146.2p on Thursday, down 12.3p or 7.8%.
'Sell' Pearson, Liberum Capital says
Liberum Capital has reiterated publishing and education company Pearson (PSON.L) as its core 'sell' in the media sector, saying the shares don't price in the underlying structural risks to the business model.
Fans of the shares have cited the introduction of Common Core Standards (CCS) in the US from 2014 as a near-term driver for the group, as new textbooks and materials are bought to prepare for the standardised testing system.
However, analyst Ian Whittaker said this is premature. 'An increasing number of states are questioning CCS. While 45 states have officially signed up, there have been recent moves in Michigan, Ohio, Indiana and Pennsylvania to suspend or reverse its implementation,' he warned.
What's more, even if the new system does materialise, Pearson may not benefit as many CSS advocates are pressing for greater use of open source education resources rather than relying on suppliers such as Pearson.
Shares in the group closed at £13.13 on Thursday, down 19p or 1.4%.
Peel Hunt upgrades Capital & Regional
Capital & Regional (CAL.L) looks set to rerate, according to Peel Hunt, which has upgraded the retail and leisure property investment company from 'hold' to 'buy'.
'Following considerable deleveraging to a 53% loan to value since about 80% during the crash, we believe that now is the time for Cap & Reg to re-rate,' analyst Kate Barlow said.
With the group in the process of recycling its portfolio Barlow acknowledged that forecasting isn't easy at the moment, but she commended the management's commitment to pay a progressive dividend.
'If Cap & Reg decides eventually to pay out the majority of earnings, we could see perhaps a high 7% dividend yield at this price, depending on acquisitions/refinancing costs/capex/etc,' she said. Her target price rises from 35p to 45p.
Shares in the group closed at 40p on Thursday, up 1.3p or 3.2%.