Broker tips: Reckitt Benckiser, HSBC, Weir

8th Nov 2011 14:01

Popular perceptions of Reckitt Benckiser's growth model are mistaken and there are other factors which favour the stock going forward relative to its peers, according to Nomura.Whereas many see the household goods maker as excessively exposed to Western Europe and North America, along with too much dependence on the "premiumisation" trend, Nomura argues that, historically, the company's business model has little to do with "trading the consumer up". Instead, the company has relied on gross margin-accretive acquisitions and a strong focus on cost-saving initiatives.Furthermore, analysts at Nomura expect additional synergies/savings to come through over the next 12 months. Furthermore, as only 28% of the company's profits are derived from household categories in developed countries, they view Reckit's business model as offering superior resilience relative to peers. The firm's shares trade on a price/earnings ratio of 13.4 based on Nomura's earnings estimate for 2012, and 9.7 times 2012's projected enterprise value/earnings before interest, tax, depreciation and amortisation ratio, a 7% discount to US peers despite higher margins (RB 23% vs Proctor & Gamble 18.5% in 2010) and better growth (4% in 2010 vs Colgate 3%).For all of the above reasons Nomura reiterates its buy recommendation on the stock with a price target of 3,900p. The broker's recommendation on the sector currently stands at 'neutral.' Britain's biggest bank, HSBC, is valued fairly at around its current 540p level according to analysts at Credit Suisse.The market is readying itself for HSBC third quarter results tomorrow as investors continue to fret about the European banking system.Credit Suisse (CS) is lowering its underlying earnings per share predictions for the bank by 7.6% for 2011 and 5.1% for 2012. It's also bringing down HSBC's target price from 640p to 610p.Full year revenues are forecast to be $17.7bn, down 11.5% on 2010 with indications from the bank that "credit and rates were weaker in Q3 [third quarter]".CS also says it will be looking "for evidence that (HSBC) is starting to deliver on its $2.5 - $3.5bn cost reduction programme." The expectation is that it may actually be increased to over £3.5bn.The key issues for the North American business will be the quality of its assets and how much capital is being shipped back to the parent group in London.The conclusion of today's note says simply: "HSBC as fairly valued and (we) remain Neutral".Despite falling 4.7% yesterday the oil and gas engineering firm Weir is getting a thumbs up from analysts at Credit Suisse, who continue to expect the stock to outperform the industrial engineering sector. Credit Suisse suggests the drop in price yesterday was a partly a reaction to the 40% increase in the company's share price over the last month, in addition to the board merely maintaining its profit guidance for the year. In other words, no big deal, and probably just a blip - a view which is backed up by the share price recovering 2% in morning trading today.With yesterday's temporary blip dealt with the CS argument is that Weir has provided "sector leading" organic growth with orders way ahead of expectations between July and September, emphasising Weir's growth potential.Credit Suisse also notes that demand for the well service pump and pressure flow control equipment made by Weir's SPM division is way ahead of supply and won't sate the market until the middle of next year at the earliest.Other plus points include a war chest of £550m for future acquisitions and an enterprise value versus sales ratio of 1.7. To top it all off, Credit Suisse believes earnings before interest, tax and amortisation margin for 2010 will be an impressive 18.5%. The broker has moved the target price for Weir up from 1850p to 2050p.--jh