Broker tips: Serco, Xchanging, Admiral

11th Aug 2009 12:14

The recent tendency of investors to favour cyclical stocks over defensives has gone too far according to Charles Stanley, which has lifted its target price on the outsourcing group Serco to 460p from 440p.Charles Stanley expects Serco, whose projects include running London's Docklands Light Railway, to post interim profit growth of 32% to £89m when it delivers results on August 26."We believe that the government's financial problems will encourage it to outsource as much as possible to the private sector over the next two years," the broker, which has a 'buy' rating on Serco, says.It notes that Serco is standing at a price/earnings ratio of 14.5, which puts it a discount to fellow outsourcing group Capita.Panmure Gordon has lowered its rating on business processing outsourcing company Xchanging to 'sell' from 'hold' on valuation grounds.While Xchanging is more geared towards the private sector than peers, which means it will be less vulnerable to cutbacks on public spending, Panmure sees 'no significant positive catalysts in the near term and continues to believe that execution risks in certain parts of its business remain high.'A sharp rise in the share price of Admiral recently has prompted broker Credit Suisse to downgrade its rating on the car insurer to 'neutral' from 'outperform.'The stock has rallied from 855p at end of June to 1,012p, Credit Suisse notes. This leaves just 8.5% upside to its unchanged target price of 1,097p, which compares with a sector average of 18%, it says.