Broker tips: Water stocks, M and S, Vodafone

29th Jun 2012 12:36

UK water stocks - United Utilities, Pennon and Severn Trent - are in 'a sweet spot in current markets', according to UBS which says they provide safe returns and consistent outperformance."We believe that the UK water companies will remain in a sweet spot for as long as the current lacklustre macro environment persists, thanks to a limited risk profile, low UK sovereign gilt yield environment, and likely ongoing inflation support from quantitative easing," the broker said.UBS initiates coverage of United Utilities with a 'buy' rating and 725p target price (TP). With Severn Trent (1,695p TP) and Pennon (740p TP) trading at a premium ("deservedly") to United Utilities, UBS has started with a 'neutral' rating on both stocks given that their relative benefits outside of M&A are already priced in.Nomura has maintained its 'buy' rating on Marks and Spencer but has cut its target price for the High Street giant, saying that the company had a weak first quarter and it sees few catalysts in the coming months."While market data indicates some improvement in clothing sales performance in recent weeks, M&S's recent market share weakness and the shift in sale timing into Q2 from Q1 benefiting sales by 1.8% last year will continue to weigh on performance, in our view."The broker says that while the stock is good for longer-term value investors, few catalysts are foreseen until the autumn-winter ranges of clothes come out in stores later this year.Jefferies has downgraded its rating on telecoms giant Vodafone from 'buy' to 'hold' and cut its target price from 195p to 180p on the back of threats from competitor fight-backs and this company's dependence on Verizon Wireless (VZW)."Only on the (low-probability) scenario that EU Mobile returns to structural top-line growth - relieving competitive pressure - would we envisage commercial costs coming down. Competitors have no incentive to adopt commercial policy that sees them leak market share to Vodafone ad infinitum."Meanwhile, the broker said: "Reliance on VZW income distributions being raised to sustain DPS growth post Mar13 is increasing Verizon's leverage over Vodafone, an unhealthy situation in our view."BC