Broker tips: Retailers, tobaccos, drinks

6th Jan 2010 11:48

The market turned its back on Marks & Spencer on Wednesday after the clothes and food retailer’s trading update, but Hargreaves Lansdown sees reasons to be cheerful.‘Quarterly sales have improved for the first time in over two years, whilst the online division posted sales which rose impressively by 32%,’ observes Richard Hunter, head of UK Equities at Hargreaves Lansdown (HL).On the downside, the return of VAT to 17.5% may depress sales while Hunter reckons pressure on consumer budgets later in the year is almost inevitable.Japanese broking house Nomura has been looking at the clothing retailer sector, as well as turning its attention to cigarettes and booze.Nomura has raised its target price on Next to 2250p from 2413p following the fashion retailer’s better than expected trading up to Christmas. Furthermore, the broker, which has a ‘neutral’ rating on Next, thinks that the possibility of an improved consumer environment offers the company the chance of better sales in relation to stock planning in the coming period. It also sees potential benefits from international online sales and trial stores in GermanyThe tobacco sector was overlooked in the 2009 recovery, according to Nomura, which has raised its rating on Lucky Strike maker British American Tobacco to 'buy' from 'reduce' with price target upped to 2,130p from 1,925p previously. It thinks that tobacco stocks, which are trading at about 11.5 times 2010 earnings, are at a discount to the market. More specifically, it believes BATS will benefit from recovery in emerging markets, fuelled by lower unemployment and input costs. Imperial Tobacco remains Nomura’s top pick in the European tobacco sector. In a spirited note on the European liquor industry, Nomura has raised its target price on Diageo to 1,300p from 1,150p. Nomura has a ‘neutral’ rating on the drinks sector, but prefers spirits over beer on valuation grounds. ‘Beer stocks outperformed spirits stocks in 2009 by a significant margin, and we think this outperformance will shift in 2010 as the near-term outlook for spirits improves,’ the broker said. It says it expects Diageo, which supplies a range of spirits as well as Guinness, to see ‘improved news flow’ in 2010. In soft drinks, meanwhile, Nomura says that juice group Britvic ‘offers revaluation potential as well as upside from future M&A activity in soft drinks.’