Broker tips: Shire, Next, Cineworld

3rd Nov 2016 10:37

(ShareCast News) - Credit Suisse downgraded retailer Next to 'underperform' from 'neutral' and slashed the price target to 4,600p from 4,950p.The bank said it was becoming increasingly cautious about Next's ability to stabilise margins in an environment of rising opex and input costs, and with brand sales looking increasingly mature."In particular the strategy of passing through higher costs, in a deflationary environment, and continuing to add space, seems likely to lead to cost de-leverage, without increasing productivity gains," CS said.The bank had upgraded the stock back in May as it reckoned the environment in the second half and through 2017 would start to improve, but it no longer believes that, as sterling weakness is likely to hit UK consumption and input costs as FX hedges roll off in H2."We are also concerned about the maturity of the Next Brand, and the sustainability of large market shares in a fragmenting apparel market, where store portfolios are of decreasing relevance." Cineworld Group's shares rose on Thursday as HSBC initiated coverage of the stock with a 'buy' rating and a target price of 720p.HSBC said Cineworld is a "UK cash cow" with the one of the market leading cinema chains in the nation. It has 115 sites generating more than £100m in earnings before interest, tax, depreciation and amortisation."Management's strategy of investing in sites and lean operations is paying off, leaving it with an up-to-date estate, circa 500,000 monthly subscribers and a strong cash base to capture market share for the upcoming blockbuster year in 2017," HSBC said."The counter cyclical nature of the industry should benefit from any Brexit related uncertainty."The first half of 2016 struggled against tough comparatives in 2015 with the release of blockbuster films Spectre, Star Wars, Avengersand Jurassic Park.However, the second half has picked up with a strong July-September quarter and HSBC expects the momentum to continue."The future looks bright for the rest of H2 16 with a number of major titles including Doctor Strange, Harry Potter's: Fantastic Beasts and Where to Find Them and Star Wars: Rogue One setting in the rest of the year for success," HSBC said. Shire got a boost on Thursday as Bank of America Merrill Lynch added the stock to its 'Europe 1' list with a 'buy' rating and 6,970p price target, saying the shares are too cheap.The bank pointed out that Shire shares have been weak since the third quarter results due to a 3% revenue miss on weakness in the legacy Baxalta franchises in their first full quarter in Shire."However, concern looks unwarranted given the miss was due to order phasing and FY16 guidance was actually tightened to the upper half of its $12.70-$13.10 range."Merrill said the share price has failed to fully regain the ground it lost after proposing its acquisition of Baxalta in August last year. It noted the stock is trading at just 9x its 2018 price-to-earnings ratio despite forecast 10% earnings per share compound annual growth rate between 2018 and 2021.The bank also argued that risks are now priced into the stock. "Although markets worry about new competition to the acquired hemophilia franchise from Roche's competitor ACE-910, and a potential $10bn tax liability from the Baxalta deal, we believe these are more than priced in."In addition, Merrill said hemophilia sales may be more robust than the market fears and that the acquired immunology business is largely being ignored.Citigroup was also pushing the stock on Thursday ahead of the company's capital markets day, saying the risk/reward is compelling.Citi said the share price was discounting an overly bearish outlook for hematology.Traders also said Shire was benefiting from a negative note by Bernstein on Roche's haemophilia drug, ACE-910, which is the major competitor to 20% of Shire's business.