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The Expert View: Tesco at the end of an era
by Chris Marshall on Dec 13, 2012 at 05:01
A roundup of some of the best analyst commentary on shares including Diageo, ITV, Whitbread and Carillion.
Tesco is just too global
Is this the end of an era? Should food retailers like Tesco stop expanding globally, marking a return from the global to the local? Analysts at Morgan Stanley suggest just that in a report praising those groups that are reconsidering some of their international operations.
‘Going forward, a large number of issues are making European food retailers’ international prospects less attractive, we believe,' says report writer Edouard Aubin.
You either become more local – Tesco for example employs a particularly high number of expats to run its overseas ops – or you dispose of assets.
‘We favour retailers adjusting to this new reality,’ Aubin says. ‘They include Carrefour and DIA, both currently in the process of significantly optimising their portfolio of assets internationally’.
Tesco though, which recently announced it was reviewing its loss-making US operations, is not taking ‘radical enough’ measures. The company remains an ‘underweight’ for Morgan Stanley, with a price target of 310p.
Shares in Tesco dropped by 0.1% yesterday to 339p
ITV: don’t turn over yet
It’s not too late to buy shares in ITV, Liberum analysts reckon, citing four reasons why investors can still expect ‘considerable upside’ after 2012’s strong rally:
1. The company should benefit from savings costs and earnings growth
2. A significant return of cash to shareholders is likely, perhaps £500 million, though this will be a one-off
3. Some City pundits are still too bearish (and could change their tune)
4. The shares are cheap with potentially 40% upside
What’s more, analysts Ian Whittaker and Lisa Hau add, ‘ITV could benefit from a major media buyer’s dispute with ITV’s main mass market rival, Channel 4’. They reiterated their ‘buy’ rating, with a 145p target price.
Shares in ITV rose by 0.4% in Wednesday trade, to 102p
Carillion dividend charms soften weak earnings outlook
Analysts have given a cautious welcome to a trading update from Carillion, with Investec’s Andrew Gibb describing it as ‘a reasonable statement against what remains a challenging market.’
The support services company said that its revenues for the full year would be lower than 2011, as expected.
The valuation on the company’s shares ‘is not demanding’, Gibb says, while a 6% forecast dividend yield helps to compensate for low earnings growth prospects. Gibb retains his ‘buy’ recommendation.
Peel Hunt’s Andrew Nussey is slightly less upbeat on the shares, with a ‘hold’ recommendation, though he agrees that the dividend yield helps. ‘The outlook is largely unchanged, but questions likely to persist over mix and deliverability,’ he notes.
Carillion shares rose by 1.5% to 300p on Wednesday
Whitbread brands continue to smash the competition
Whitbread continues to woo the City, with JP Morgan Cazenove raising its target price on the hotel, coffee shop and restaurant operator’s shares after yesterday’s report of 14.4% year-on-year growth in third quarter sales.
The new price target of 2,650p, up from 2,500p, reflects JP Morgan’s belief that ‘both Premier Inn and Costa Coffee will continue to outperform their peers’. The shares get an ‘overweight’ recommendation from the bank.
While most analysts are upbeat on the shares – only two say sell according to Reuters data – James Hollins of Investec reiterated his 'sell' recommendation on Whitbread, saying the strength of the coffee business doesn't make up for weakness elsewhere.
Whitbread shares ended Wednesday trading down nearly 1% at 2,463p
Diageo ‘shows discipline’ in refraining from tequila binge
Diageo, the drinks company that has seen its share price soar this year, has shown ‘capital discipline’ in pulling out of talks to buy a stake in tequila brand Jose Cuervo, Nomura says.
The company though is left without a major tequila brand – and sees a distribution deal with Cuervo end in June – while expectations for a deal had been high. So Nomura’s Ian Shackleton has trimmed his target price on Diageo shares, from 2100p to 2070p, despite the decision not to over-pay for Jose Cuervo.
Rather than acquiring Beam, as has been speculated, Shackleton reckons Diageo will now focus on its super-premium Don Julio brand, while innovating to fill any gap in the mainstream tequila market.
‘We do not see the company acquiring Beam to get the No2 mainstream tequila brand Sauza. We estimate that one year's innovation in the US can offset the lost profit from Cuervo distribution (GBP60m),’ the Nomura analyst added.
Shares in Diageo dropped by 0.5% to 1,845p yesterday