The Expert View: M&S, Babcock, Imagination Technologies

Our daily round-up of analyst recommendations and commentary, featuring M&S, Babcock International, Imagination Technologies, Pace and Severfield-Rowen.

Key stats
Market capitalisation	£6,366m
No. of shares out	1,608m
No. of shares floating	1,583m
No. of common shareholders	not stated
No. of employees	81208
Trading volume (10 day avg.)	5m
Turnover	£9,934m
Profit before tax	£513m
Earnings per share	32.23p
Cashflow per share	60.28p
Cash per share	28.44p

*Correct as at 6 Nov 2012

Seymour Pierce increases target price for Marks and Spencer

Freddie George, analyst at Seymour Pierce, has increased his target price for Marks and Spencer (MKS.L) after first-half results beat forecasts despite showing a decline in profits for the second year in a row.

In the six months to the end of September pre-tax profits came in at £296.8 million, ahead of George's forecast of £285 million but down 6% on a year ago. Sales suffered amid a general downturn in British retail sales in October, which fell 0.1% on a year ago.

George's target price rises from 325p to 365p, and he reiterated his 'hold' recommendation on the shares. 'The stock has outperformed the FTSE All share by almost 20% and considering the c.10% downgrade to consensus earnings during the year has been re-rated against the market by over 30%,' he said. 'It is thus likely to see some profit taking.'

Over at Singer analysts said the results could herald a turnaround following the recent management shake-up. 'M&S has been dogged by ranging and buying issues over the last few quarters, part of which may have stemmed from management uncertainties and today's update suggests they are taking control in this regard after securing a new team,' they said.

Peel Hunt, meanwhile, said confidence in a recovery seems 'muted', and analysts there continue to prefer Debenhams.

Shares in the group closed at 398.7p on Tuesday, up 10.8p or 2.78%.

Key stats
Market capitalisation	£3,442m
No. of shares out	360m
No. of shares floating	354m
No. of common shareholders	not stated
No. of employees	25325
Trading volume (10 day avg.)	1m
Turnover	£2,848m
Profit before tax	£154m
Earnings per share	42.76p
Cashflow per share	75.61p
Cash per share	28.87p

*Correct as at 6 Nov 2012

Investec downgrades Babcock International to 'hold'

John Lawson, analyst at Investec, has downgraded engineering support services company Babcock International (BAB.L) from 'buy' to 'hold' following a trading update that wasn't quite good enough to justify the valuation of the shares.

Over the past six months pre-tax profits rose 13% to £142.7 million, falling short of Lawson's forecast of £150 million and the consensus estimate of £145 million.

'Babcock has been one of the best performers in the sector for some time and, whilst today’s figures were good, we move from Buy to Hold, mostly a valuation call after a strong run up,' Lawson said.

Although he stressed that it remains an attractive business with solid underlying growth and one of the biggest orderbooks in the sector, the shares have now more or less hit his medium-term target price of £10.

Shares in the group closed at 953.5p on Tuesday, down 34.5p or 3.49%.

Key stats
Market capitalisation	£1,245m
No. of shares out	265m
No. of shares floating	235m
No. of common shareholders	not stated
No. of employees	967
Trading volume (10 day avg.)	0m
Turnover	£128m
Profit before tax	£20m
Earnings per share	7.45p
Cashflow per share	9.56p
Cash per share	25.08p

*Correct as at 6 Nov 2012

FinnCap backs 'defensive' acquisition at Imagination Technologies

Lorne Daniel, analyst at FinnCap, has welcomed Imagination Technologies (IMG.L)'s acquisition of MIPS Technologies, saying it's a defensive move to protect the chipmaker against rising competition from rival ARM Holdings.

Imagination has paid £37.6 million in cash for the operating business and intellectual property belonging to MIPS Technologies, which designs central processing units (CPUs).

Daniel said the acquisition was 'very defensive', and intended to meet the challenge of ARM's increasing presence in the graphics chip market. ARM has won market share with its Mali platform, a combined CPU and graphics chip that reduces power consumption, which is an important consideration for smartphone makers. Intel is also beginning to make inroads in the market, which is another worry for Imagination.

The MIPS acquisition should diversify Imagination's product range into set top boxes and gaming devices, Daniel said. The analyst retains a 'hold' recommendation on the shares and a target price of 500p.

Shares in the group closed at 474.8p on Tuesday, up 9.8p or 2.11%.

Key stats
Market capitalisation	£564m
No. of shares out	306m
No. of shares floating	254m
No. of common shareholders	not stated
No. of employees	1629
Trading volume (10 day avg.)	1m
Turnover	1,445m USD
Profit before tax	24m USD
Earnings per share	0.08 USD
Cashflow per share	0.34 USD
Cash per share	0.10 USD

*Correct as at 6 Nov 2012

JP Morgan lifts target price for Pace ahead of trading update

Alexander Mees, analyst at JP Morgan, has increased his target price for set-top box maker Pace (PIC.L) ahead of what he expects to be an upbeat trading update next week.

The analyst cited three reasons to be optimistic about the third-quarter trading update:

• Rising activity levels: some of Pace's biggest customers, including AT&T and Comcast, have recently reported positive growth in cable and broadband revenues in the US.
• Rising margins: Mees said better management of procurement costs led to a significant rise in underlying operating margins in the first half, and he expects margins over the year to hit 7.5%, up from 6.4% a year ago.
• Improving cash flow: 'There is, in our opinion, scope for Pace to complement the improvement in inventory management that underpinned its strong cash flow in H1 2012 with better management of receivables,' Mees said.

Mees's target price rises from 134p to 205p, and he reiterated his 'overweight' recommendation.

Shares in the group closed at 185.3p on Tuesday, up 1.9p or 1.04%.

Key stats
Market capitalisation	£98m
No. of shares out	89m
No. of shares floating	81m
No. of common shareholders	not stated
No. of employees	1207
Trading volume (10 day avg.)	0m
Turnover	£268m
Profit before tax	£6m
Earnings per share	6.52p
Cashflow per share	14.65p
Cash per share	2.54p

*Correct as at 6 Nov 2012

Peel Hunt slashes target price for Severfield-Rowen on profit warning

Dominic Convey, analyst at Peel Hunt, has slashed his target price for structural steelwork firm Severfield-Rowen (SFR.L) after the group issued a profit warning.

In its interim management statement Severfield-Rowen said its UK operations are suffering from pricing pressures and problems with contractual settlements, and it now expects to make a pre-tax profit of £1 million this year, down from previous expectations of £8 million.

In brighter news, the group's Indian joint venture is going well and now boasts an orderbook of £31 million through to 2013. However, Convey said the gloomy picture in the UK prevents him from adopting a more positive stance, and his target price falls from 155p to 100p, with a 'hold' recommendation.

To conserve cash Severfield-Rowen won't be paying a second interim dividend this year, and Convey isn't expecting a final dividend either.

Shares in the group closed at 104.16p on Tuesday, down 2.59p or 2.43%.