Broker tips: Tesco, Home Retail, Shire

21st Oct 2009 13:12

The international business of Tesco is undervalued, according to Nomura Securities, which reckons the UK-based retailer has the potential to effectively create a 'new company' over the next five years.Nomura believes 'Tesco will effectively create "a new company" with sales of £27.3bn, EBITDA of £2.65bn, an underlying EBIT [earnings before interest and tax] margin of 7.3% and CROI of 25.9%, far superior to the existing one.'If Tesco does complete this amoeba-like transformation, Nomura estimates that the 'new company' alone could be worth £16.4bn, or 209p per share. This has prompted the broker to lift its price target from 405p to 526p, 'offering 39% upside potential to current levels'. The broker has reiterated its 'buy' recommendation.Results from Argos and Homebase operator Home Retail were slightly ahead of expectations, but that has not stopped Seymour Pierce from issuing a recommendation to sell the shares.Seymour Pierce believes the stock is 'more than fairly valued' at 15.9 times projected earnings for fiscal/2009/10.The broker has issues with the company's reliance on the UK market, and suggests that the Argos retail model does not seem to be replicable overseas. Additionally, the deteriorating margins the group's businesses are experiencing indicates that Argos and Homebase are feeling the heat from their competition.'Argos, which will benefit from capacity coming out of the market, is facing growing competition from the food retailers, which are ratcheting up their non food effort, and from a better performance from the electrical retailers, in particular DSG International,' Seymour Pierce notes. 'Homebase is becoming more dependent upon the discount weekends while competitor, Focus DIY has survived and could become a more credible competitor,' the broker added.Pharmaceuticals company Shire issues third quarter results next week, prompting Morgan Stanley to take another look at the company and ratchet up its price target for the stock.Morgan Stanley has an 'overweight' rating on the shares and a price target of 1214p, up from 1200p previously.'The stock is down around 10% from its recent highs in late September and we remain positive on the long-term potential of the HGT [human genetic therapies] business, which we estimate could comprise 33% of earnings in 2014,' the US bank said.