JPM ups Bodycote to 'neutral' , says 'underweight' thesis has largely played out

22nd Aug 2016 07:38

(ShareCast News) - JPMorgan Cazenove upgraded Bodycote to 'neutral' from 'underweight' and lifted the price target to 605p from 565p, saying its UW thesis on the stock has largely played out.The bank said its UW rating was primarily based on end-market headwinds not being reflected in expectations, below-consensus earnings estimates, a rating that did not reflect a challenging outlook and risks to earnings, and inflated expectations on the likely progression of margins and therefore earnings.It was also worried the stock was a consensus long on both the buy and sell sides.JPM pointed out that the weaker financial performance has led the stock to underperform its UK capital goods stocks coverage by 13% in the past year.The share price performance and de-rating also point to an unwind of the consensus long positioning, on the buy-side at least, JPM said."Our estimates are no longer meaningfully below 2016 Bloomberg consensus EPS, end markets and the margins expectations better reflect the outlook, and the shares have reached a level we see capturing the ongoing risks in what remains a weak backdrop.""With the headwinds of inflated expectations and a premium rating removed, we reassess the investment case of the greater margin resilience and an improved cash flow (and resulting balance sheet optionality) and upgrade the stock."