The Expert View: Tesco, Cape and Next

Our daily round-up of analyst recommendations and commentary, featuring Tesco, Cape, Next, Associated British Foods and Debenhams.

Key stats
Market capitalisation	£30,552m
No. of shares out	8,041m
No. of shares floating	8,010m
No. of common shareholders	not stated
No. of employees	519671
Trading volume (10 day avg.)	19m
Turnover	£64,539m
Profit before tax	£2,948m
Earnings per share	36.64p
Cashflow per share	55.36p
Cash per share	43.02p

*Correct as at 6 Mar 2013

Tesco emerges from the wilderness

After almost two years of corporate self-examination, Tesco (TSCO.L) has made it through to the other side, according to Shore Capital analyst Clive Black, who has upgraded the shares from 'hold' to 'buy'.

'From the context of a necessity to sustainably stabilise its market share in UK grocery, its core, which we believe is commencing, management can now press on with greater purpose in driving out free cash flow and so more demonstrably embrace shareholder-friendly initiatives,' Black said.

Although the analyst expects the cash flow resulting from these plan to be 'more of a trickle than a flood' at first, he said the important thing was the new-found direction at the group.

'with a settled management team and a managing director of the UK in place, stabilisation of the core chain appears to be under way. Along with an exit from Japan and the USA, management can embrace a new course; a more shareholder-friendly journey,' he added.

Shares in the group closed at 380.6p on Wednesday, up 8.4p or 2.3%.

Key stats
Market capitalisation	£321m
No. of shares out	121m
No. of shares floating	118m
No. of common shareholders	not stated
No. of employees	16247
Trading volume (10 day avg.)	0m
Turnover	£723m
Profit before tax	£47m
Earnings per share	38.76p
Cashflow per share	55.61p
Cash per share	58.67p

*Correct as at 6 Mar 2013

An ‘inflection point’ for Cape

Cape (CIU.L), the struggling building services supplier to energy firms, may be at an ‘inflection point’, says Canaccord Genuity analyst Michael O’Brien.

On Wednesday the company revealed that full-year profits had slumped by two thirds due to problems in Algeria and Australia.

But the results came alongside what Joe Oatley, Cape’s chief executive, described as a ‘root and branch review of our balance sheets’.

O’Brien said: ‘We believe that the risk reward ratio for investors has improved substantially on the back of these results and evidence that the contract base is now, in essence ''clean''.’

Canaccord has raised its target price on the shares from 254p to 303p and upgraded the company from ‘speculative buy’ to a full-blooded ‘buy’.

Shares in the group closed at 264.6p on Wednesday, up 32p or 14%.

Key stats
Market capitalisation	£6,895m
No. of shares out	164m
No. of shares floating	151m
No. of common shareholders	not stated
No. of employees	28685
Trading volume (10 day avg.)	0m
Turnover	£3,441m
Profit before tax	£434m
Earnings per share	251.48p
Cashflow per share	320.73p
Cash per share	40.83p

*Correct as at 6 Mar 2013

Cantor Fitzgerald expects another strong update from Next

Cantor Fitzgerald analyst Kate Calvert has increased her target price for clothing retailer Next (NXT.L) ahead of what she expects to be another strong set of results on 21 March.

'We expect Next’s full-year results on 21 March to show another year of double-digit earnings growth in-line with management’s longer term forecast,' she said.

'While a mature business in terms of number of stores, NEXT continues to drive growth by pursuing marginal gains in its offer, service and efficiency which enhances its already highly profitable multi-channel business.'

Calvert's target price rises from £35 to £40, but she held off lifting her 'hold' recommendation. 'We believe the revaluation of the shares has gone far enough, with the shares having been re-rated from single digit to a 2014 price to earnings of 13x,' she added.

Shares in the group closed at £42.03 on Wednesday, up 23.4p or 0.6%.

Key stats
Market capitalisation	£14,683m
No. of shares out	794m
No. of shares floating	333m
No. of common shareholders	not stated
No. of employees	106243
Trading volume (10 day avg.)	1m
Turnover	£12,252m
Profit before tax	£555m
Earnings per share	70.34p
Cashflow per share	139.29p
Cash per share	49.39p

*Correct as at 6 Mar 2013

BNP Paribas downgrades Associated British Foods

BNP Paribas analyst Jeff Stent has downgraded Associated British Foods (ABF.L) from 'neutral' to 'underperform' following a strong stretch for the shares.

'Both this year and last, ABF has been the best performer within our sector coverage, this performance principally stemming from the re-rating of Primark,' Stent said, referring to the success of the group's cut-price clothing chain.

Although the analyst said he doesn't see material downside to 2013/2014 consensus earnings estimates, he said the premium valuation of the shares, combined with a toughening outlook in its sugar operations, means it's time for a downgrade.

Shares in the group closed at £18.44 on Wednesday, down 21.8p or 1.2%.

Key stats
Market capitalisation	£1,052m
No. of shares out	1,263m
No. of shares floating	1,144m
No. of common shareholders	not stated
No. of employees	8355
Trading volume (10 day avg.)	12m
Turnover	£2,230m
Profit before tax	£125m
Earnings per share	9.77p
Cashflow per share	16.92p
Cash per share	3.48p

*Correct as at 6 Mar 2013

JP Morgan downgrades Debenhams

JP Morgan analyst Georgina Johanan has downgraded high-street department store Debenhams (DEB.L) from 'outperform' to 'neutral' in the wake of Monday's profit warning.

The shares tanked more than 14% following the announcement after Debenhams said trading in January had been ‘severely disrupted’ by heavy snow fall.

'Following the recent profit warning, we see near term management guidance as leaving little room for error,' Johanan said. 'Given the earnings trajectory in recent months and changes to guidance, our view is that the group once again needs to become consistent in its delivery on forecasts in order for investor faith to be restored.

'Ahead of evidence that the group is back on this track, and with near term risks finely balanced, we reduce our recommendation to neutral.' Johanan's target price falls from 137p to 95p.

Shares in the group closed at 83.7p on Wednesday, up 1.1p or 1.4%.