Broker tips: National Express, Bunzl, small caps

19th Oct 2009 13:06

Panmure Gordon has raised its recommendation on National Express to 'buy' from 'hold' following the announcement of a 'highly preliminary proposal' by fellow rail and bus group Stagecoach to acquire the firm.Shares in National Express collapsed on Friday after a consortium including the Cosmen family, a large shareholder in the group, abandoned a proposal to make a 500p a share bid for the group.Stagecoach's proposal announced Monday would result in National Express shareholders owning 'no more than 40% of the enlarged group.' Panmure notes that this compares with National Express's 33% share of the combined market capitalisation of both companies, based on Stagecoach's closing price last Friday, which would thus imply an offer price of about 490p. Broker Charles Stanley remains a buyer of Bunzl after the distribution group's interim management statement indicated margins are on the mend.'As expected, overall profit margins have improved compared to the first half largely due to the favourable impact of cost reduction initiatives already taken and a reduced negative transaction impact from foreign exchange,' said Tony Shepard, investment analyst at Charles Stanley.The broker is looking for a further improvement in operating cash flow as the 'economic recovery eventually kicks in,' which will lead to an improvement in working capital.Nomura Securities has been sizing up the relative performance of small caps and large caps, and reckons that the recent outperformance of small caps may not last beyond the current year.'We see a case for further support for small caps in the short term. Analysts have changed from downgrading estimates sharply six months ago to upgrading now. Our analysis indicates that the first three months of analyst upgrading are associated with further outperformance from the small caps,' reckons Ian Scott, an investment analyst with the Japanese broking house.Scott's analysis indicates, however, that after a three month honeymoon period, it is 'the large caps that usually outperform.'The broker believes that large caps are a better bet over a three to twelve month time frame and favours consumer staples, telecoms and utilities, while eschewing consumer cyclicals.