Broker tips: Electrocomponents, Compass, Tesco

28th Sep 2012 18:41

In a report issued yesterday analysts at Charles Stanley downgraded their view on shares of contract caterer Compass Group, to hold from buy. Thus, they pointed out how: "Over the last 12 months the Compass Group share price has risen by 30% and is near record highs. "Compass Group will be publishing its FY12 results on 21st November and today, it has issued a trading update for the year ended 30 September 2012. As expected, the Group has delivered a good performance in quarter four and for the year organic revenue growth of about 5.5% is as expected with strong performances in North America and Fast Growing & Emerging regions offsetting a weak performance in Europe & Japan. In the opinion of Seymour Pierce Electrocomponents's flat sales growth in the second quarter of 2013 was a decent outturn given tough comps (+8% one year ago) and the global macroeconomic background. In particular, they believe that today's results showed that Electrocomponents is outperforming the market and its closest peer Premier Farnell.Group gross margin is expected to be 1.2% lower in the first half of 2013 given the increased use of customer discounts, changes in product mix towards lower margin products (e.g: Raspberry Pi) and adverse foreign exchange movements.Even so, they add that: "Despite today's profit warning, we believe Electrocomponents is pursuing the right strategy, which will put it on a stronger platform to benefit from the upturn in the global economy whenever that may be," despite which -given the current uncertainties- they downgrade Electrocomponents from BUY to HOLD (Buy since 13 July 2012) with a 195p target price.Analysts at Seymour Pierce have downgraded their view on shares of food retailing giant Tesco ahead of its report of first half results (to the end of August) on Wednesday October 3rd.The broker believes that markets will focus on the company´s core UK business and an update on how the implementation of its six-point plan to update its store estate and offer is progressing. They also want to see how the aggressive couponing has affected sales and profitability. "Attention will also be focused on whether the international business has slowed much from its Q1 update, particularly South Korea where new opening hour legislation was introduced at the end of Q1, as well as an update on the US where losses are still unacceptably high," they add. Furthermore, they warned their clients that: "While the valuation is not the most demanding (calendar year 2013 price-to-earnings multiple ex-property profits of 9.7x and yielding 4.4%) given potential longer term growth, there is no visibility on where UK profitability will bottom and whether management actions will work in the medium term." For all of the above reasons they have decided to downgrade their recommendation to REDUCE from Hold (Hold since 8/12/11). AB