Broker snap: Seymour Pierce upgrades Home Retail but still concerned about Argos

17th Jan 2013 10:53

Seymour Pierce has upgraded its rating for Home Retail Group from 'hold' to 'sell' after the firm raised its profit guidance on Thursday, owing to a better-than-expected performance by its Argos division.Nevertheless, the third-quarter trading update was still mixed, the broker said, with Argos beating forecasts and Homebase figures disappointing.Argos like-for-like (LFL) sales rose by 2.7% in the quarter, better than Seymour's 2% estimate, while Homebase LFLs were down 3.9%, worse than the -3.5% estimate.Home Retail is now pointing to full-year underlying pre-tax profits £10m ahead of the current consensus estimate of £73m. However, Seymour Pierce is not changing its top-of-the-range estimate of £80m.Despite the rating upgrade and Argos beat, analyst Freddie George remains cautious. He said: "we are concerned that the decline in profits at Argos over the last five years is more structural than cyclical and the outlook is unlikely to change over the next three years. There is also little in the current strategy that, in our view, will arrest the current decline in Argos' profits."In addition, we believe Argos could still be forced into a restructuring programme reducing the number of stores, which could impact the company's currently strong balance sheet and the support provided by the sum of the parts valuations."However, he said that in a more favourable economic environment, private equity players could be tempted to make a bid for the company and run the business for cash.The target price for the shares has been raised from 70p to 115p.The stock raced ahead in morning trade, up 15.88% at 140.8p by 10:53.BC