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The Expert View: Ocado, BP and ARM Holdings
by Michelle McGagh on Feb 05, 2014 at 05:01
Our daily round-up of analysts recommendations and commentary, also including Next and BG Group.
Our daily round-up of analyst recommendations and commentary, featuring Ocado, BP, BG Group, ARM Holdings and Next.
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Challenges remain for ‘over-valued’ Ocado
After a ‘transformational’ year, online supermarket Ocado (OCDO.L) still reported weaker than expected full year results that have led Shore Capital to reiterate its ‘sell’ recommendation.
Analyst Clive Black placed a target price of 523p on the shares. He said the deal with Morrison’s last year that turned Ocado from online grocer into supermarket hub was not enough and the results were ‘disappointing’.
‘We continue to struggle with the Ocado business model, which seeks to deliver multiple-temperature products to a highly fragmented customer base from a central picking facility,’ he said. ‘The ongoing challenges of overcoming logistics issues for Morrison’s is reflected in the fact that the new venture is not expected to make a trading profit until 2018.’
While Ocado’s share price may have pushed up quickly ‘following the seemingly never-ending ascent of ASOS’, Black said ultimately they are different businesses and ‘Ocado is a million miles from [the ASOS] proposition’ because of its focus on perishable goods.
Black said Ocado is ‘over-valued’ and its core business has ‘no margin’.
At the time of writing shares were down 4.28%, or 22p, at 501p.
BP flows in the right direction
Oil giant BP (BP.L) is ‘moving in the right direction’ after ‘solid’ Q4 results, according to analysts Liberum.
Analyst Andrew Whittock said that while free cash flow generation ‘needs to be improved’ the overall direction for the company was good. He retained his ‘hold’ recommendation and target price of 450p on the shares.
However, he added a word of caution that the outlook for this year will depend on margins achieved at the Whiting refinery in Lake Michigan.
‘Our initial reaction is that the results were in line and solid,’ he said. ‘Capital expenditure at the bottom end of the range should be welcomed and BP remains committed to trying to grow sustainable free cash flow. We expect only small changes to forecasts and expect to retain our hold recommendation.’
At the time of writing shares were down 1.39%, or 6.5p, at 467p.
Don’t expect BG shares to perform short term, says Canaccord
Fourth quarter results for BG Group (BG.L) were as expected, but investors will take a more cautious view of the company due to production downgrades, said Canaccord analysts.
Analyst Richard Griffith maintained his target price of £12.50 on the shares after Q4 results were in line with market expectations and the 27 January trading update.
Although Griffith said the results did not impact on Canaccord’s view of BG, he warned that the production downgrade for 2014 and 2015 announced in the trading update ‘surprised the market’.
‘We think the latest cut to 2014 and 2015 guidance is likely to see the market adopt a more cautious stance with BG ahead of the company meeting key project milestones in Australia and Brazil. So we do not expect the shares to perform short term,’ he said.
At the time of writing BG shares were up 1.46%, or 15p, at £10.40.
Stall in smartphones hits ARM’s earnings
Poor growth in the smartphone market is bad news for ARM Holdings (ARM.L) which produced earnings per share below consensus.
Numis analyst Nick James maintained his ‘hold’ recommendation and target price of 800p on the shares.
ARM, which produces microchips for smartphones, saw ‘stronger group revenues’ in Q4 but the ‘higher than expected opex (operating expenses) drove a small earnings per share miss against consensus’, said James, who added that the weaker US dollar was also a concern.
‘Looking forward ARM notes that it is likely to see slower growth in ‘one end of the market’ (smartphones) but believes royalties [from patents it owns] can grow at a ‘similar rate’ to that reported over the past three years,’ said James.
At the time of writing shares were down 3.66%, or 34.5p, at 895.5p.
'Core holding' Next now fairly valued
After an ‘outstanding’ Christmas performance for Next (NXT.L) the high street retailer's shares are looking ‘fairly valued’, according to Investec.
Analyst Kate Calvert resumed coverage of the stock with a ‘hold’ recommendation and a target price of £63.00, stating that Next would be ‘a core holding’ even though growth is expected to slow this year when compared with the last five years.
Calvert pointed to the online Next Directory as a key area.
‘Directory is a fantastic business with an industry leading service proposition,’ she said. ‘We expect Directory to continue to benefit from the natural growth in online and the growing number of cash customers, which has been the key driver of the business in recent years.’
She said the shares have ‘materially re-rated and are valued on a sector premium’ but as the sector growth was expected to slow she had to recommend a ‘hold’.
At the time of writing shares were down 0.57%, or 35p, at £61.50.