Broker snap: Next falls after Deutsche Bank downgrade

26th Oct 2011 11:58

Next was one of the worst performing stocks on the FTSE 100 on Wednesday after Deutsche Bank downgraded the high street giant from buy to hold, saying that it expects share price upside to remain muted until after Christmas.The German broker notes that Next has been the second best performing stock on the FTSE 100 during the year-to-date, up 23% since its August lows while the index has risen just 10% over the same period."The stock has closed its historic price-to-earnings ratio discount to both the sector and UK market (14%/ 9% respectively over the last five years) and now trades at a modest premium (of 7%/14%)," analysts said.The broker expects the firm to report weaker-than-expected third quarter sales due to the unseasonably warm weather to date. As such, "Autumn-Winter ranges will have gotten off to a lacklustre start." Therefore, the broker cuts its third quarter and second half revenue assumptions by 3% and 1%, respectively.Nevertheless, Deutsche Bank still thinks that Next remains an attractive stock for long-term investors as its numbers imply a 14% compound total shareholder return over the next five years ("in the absence of a re-rating"). However, its analysts indicate that, "we see better 12-month upside elsewhere in our UK coverage universe. Our top large cap pick is Kingfisher (Buy, 268.70p, PT 350p, 30% potential upside)(...) Nevertheless, we identify six reasons we could turn constructive on Next again."Those six reasons are: 1. International Directory becomes a material growth driver2. Evidence of a sustained revival in womenswear3. Higher growth and larger scale of opportunity in Home4. Confidence gross margin tailwinds will flow through to bottom line5. Improvement in the UK consumer6. A pull back in absolute valuationA 2,780p target price is retained.By 11:58, shares were down 2.1% at 2,557p.BC