Broker snap: Credit Suisse ups Burberry price target

14th Jul 2011 10:52

Credit Suisse has raised its target price on Burberry, but the broker thinks that a lot of investment will be needed to maintain strong sales growth and keeps its "neutral" recommendation on the luxury fashion chain.It ups its target price on Burberry to 1,420p from 1,310 following yesterday's trading update.The broker was very impressed with the strong sales Burberry posted and thinks that growth in China will help it maintain its momentum. However, a luxury brand such as Burberry has to plough in a lot of money to maintain its appeal."A lot of reinvestment is required to support the current exceptional growth levels (above 30%): this means significantly higher opex (e.g. customer service, planning, warehousing, etc), higher depreciation, extra costs with flagship store projects, etc," Credit Suisse notes. "This is why margin guidance remains unchanged."Outlining its "investment thesis", Credit Suisse notes: "Burberry shares are underpinned by very strong top line momentum and perceived corporate activity appeal, but investment step-up should cap margins in the short term and its premium valuation to peers has actually widened to new all-time highs, keeping us Neutral on the stock."It notes that shares in Burberry trade at about 22 times 2012 estimated earnings, a 20% premium to the sector.---RG