Broker tips: Halfords, BAE Systems, Sainsbury's

8th May 2013 13:13

Good management alongside a strong product offering makes for a potent mix. That, in essence, is the reason why analysts at J.P. Morgan have today revised their target price for Halfords to 405p from 243p before. The broker expects the retailer and car maintenance group´s upcoming strategy update to be on driving the top-line through a 'halo effect' of better service, a wider product range and a stronger multi-channel offering. That, combined with their expectation for high quality management should drive increasing investor enthusiasm in the firm´s 'equity story.'As a result of this they have decided to apply a 20% premium of to the sector´s long-run average price-to-earnings ratio (PER) of 12.5 times earnings, which yields said March 2014 target price of 405p. In turn the resulting target price is backed up by the valuation of Halfords discounted cash flows (a measure of the present value of the real funds which a company is expected to generate once they are adjusted for the risk - as measured by the volatility of its share price - inherent to its business, when compared to that of the wider market, and the passing of time). The new target price implies 10% potential upside and so they raise their recommendation to overweight, from underweight. BAE Systems announced Wednesday it was trading 'in-line' with expectations in the first four months of the year.Analysts at Jefferies International said the company's interim management statement had a "robust feel to it".While sequestration in the US may cause disruption to BAE's business it will not significantly blow the company off course this year, the broker added."Looked at most simply, at the same stage in fiscal year (FY) 2012 BAE had secured just £1.1bn of non-UK/US orders, but finished FY2012 strongly and has made a healthy enough start - orders worth £2.3bn - to FY2013 with more in the wings, in our view," the analyst said."It is still possible that cuts to future US defence spending could be of a magnitude and scope that make it challenging for BAE to grow its revenues in FY2013 and FY2014, but we remain of the view that BAE did not lightly announce a three-year share repurchase programme of up to £1.0bn."Sainsbury's 2012 results met expectations as it lifted profits 6.2% to £756m, according to Jefferies International.However, these analysts said they were disappointed with the UK grocer's capital expenditure (capex) guidance. Sainsbury's expects core capital expenditure of around £1.1bn in 2014/15."The shape of future capex was underwhelming given an actual increase in net capex to £1.1bn in the year to come [still 4.1% of gross sales]," the broker said. "Despite a reduction in destination store openings, infrastructure spend looks set to double in the near term."In its annual results, the supermarket also announced it reached an agreement to take full ownership of its joint-venture banking business.Across the group, with total sales rising 4.6% to £25.6bn, underlying profits up 6.2% to £756m and earnings per share up 9.3% to 30.7p in the 52 weeks to March 16th 2013, the firm hiked its dividend 3.7% to 16.7p."We see no reason to change our profit and loss estimates [2013/14 profit before tax £791m, consensus £785m] before the impact of the buy-out of the 50% partner in Sainsbury Bank," Jefferies added. "This will likely be dilutive in the mid-term (given the inevitable double-running costs involved as Sainsbury builds a dedicated platform)."Jefferies told investors to 'hold' and gave the company´s stock a target price of 396.50p, close to where they were trading at the start of today´s session.AB