Broker tips: Diageo, InterContinental, Pearson

25th Oct 2010 13:21

Nomura recommends a 'buy' for Diageo after the broker highlighted several attractive options for the drinks giant.Firstly, the broker hints that luxury goods firm LMVH's purchase of a stake in sector peer Hermes could persuade LVMH to put its drinks division, Moet Hennessy, up for sale. According to the broker, the acquisition "has led to renewed commentary" that in order to finance the bid, a sale of LVMH's controlling stake in the champagne and brandy maker is possible, and Diageo would almost certainly be in the queue to buy it.Other sector consolidation options could also become available, "with a possible break-up of Fortune Brands offering spirits brands like Jim Beam or Sauza; with the renewal of the Jose Cuervo distribution deal coming up; with premium local spirits looking more attractive," says analyst Ian Shackleton.All or any of those brands would sit nicely among Diageo's portfolio of globally-renowned brands such as Smirnoff, Johnnie Walker and Guinness."With circa £1bn of free cash flow even after dividends, we also see a renewal of the buyback to be announced with interim results in February, although at probably circa £0.5bn per annum to allow some flexibility on acquisitions," Shackleton said.The broker says that even after the recent rise in share price, it still sees the shares as attractive. as there are more visible signs of recovery in global spirits trading. The broker's target price for Diageo is 1,450p.Panmure Gordon has upgraded its forecasts and target price for InterContinental Hotels after the company announced another positive trading update.The group revealed a 6.7% increase in revenue per room (or revpar) in its Americas division for the third quarter."We have increased our Americas revpar assumption for the 2010 full-year from 3.5% to 4.6%", the broker said.Occupancy growth rose by 3.8 percentage points and rate growth increased by 0.8% as business travellers returned in greater numbers.The company is the world's top hotelier in terms of number of rooms through its Crowne Plaza and Holiday Inn chains.Relaunches of revamped Holiday Inn and Holiday Inn Express hotels delivered revpar growth rates of 7.9% and 6.8%, respectively."As a consequence of our Americas revpar upgrade, our 2010 earnings per share forecast increases by 2.7% to 95.1¢ and our 2011 earnings per share forecast increases by 2.5% to 106.2¢", the broker said.The upgrade to forecasts has driven Panmure increase in its target price for InterContinental from 1,235p to 1,370p. The broker has strongly reiterated its 'buy' recommendation.Investment house Killik sees strong earnings momentum for publishing and education group Pearson after the group lifted its full-year guidance in the third quarter."Although the end of the year is the key selling season in education and consumer publishing, and both businesses face tough comparables in the fourth quarter, the group now expects adjusted earnings per share to be approximately 10% ahead of last year, implying 72p versus previous guidance of 70p", the broker said. During the first nine months of the year, the group increased sales by 7% and adjusted operating profit by 15%.The group saw an underlying sales growth of 5% in Penguin, 5% in Education and 8% at the Financial Times, as all parts of the company continued to perform strongly."A long-term process of investment is expected to leave the group with strong market positions and well placed to benefit from a shift to services and developing economies," said Jonathan Jackson, head of Equities at Killik."We believe spending on education remains a key priority for every administration and this, combined with the group's strong market position (especially in testing and technology), leaves Pearson well placed at a time when its financially-stretched competitors are struggling to invest", the broker added.The target price for Pearson is 976p.