Broker tips: Weir Group, IAG, Greggs

Even under the most bearish scenario, at current prices there is upside potential to engineering outfit Weir Group’s share price, analysts at Deutsche Bank said in a note e-mailed to clients dated 12 December.

The company has exposure to the drop in the oil price, given that it sells pressure pumps to the US unconventional oil drillers.

However, at the moment the stock is discounting an approximately 35-40% fall in the so-called ‘rig count’. The broker’s central forecast, on the other hand, is for a decline of only between 15-20% through 2016. That yields 15% valuation upside.

So the possibility of a further move lower in the oil price represents a key risk and “buying ahead of consensus downgrades always feels a bit too early” but risk/reward trade-off is skewed to the upside.

The resilience of the company’s margins is also a key positive, Deutsche Bank added.

For all of the above reasons, the broker opted to initiate its coverage of the firm with a ‘buy’ recommendation and a price target of 1,975p.

Shares in IAG may have gained recently on the back of fuel price weakness, but they do not reflect the improvement seen at its Spanish subsidiary, Iberia.

The latter is the result of management’s success in re-structuring the company’s operations, Credit Suisse explained to clients in a research note on Monday.

As well, stock in the company is trading at an enterprise value to operating profits multiple (EV/EBITDAR) for next year of just five, versus peers Lufthansa at 5.5 and Delta at four.

Furthermore, potential exists for further operational improvements at the Spanish unit, as the company itself laid out at an investor update on 12 December. The key themes of the presentation were the modernisation of the firm’s product, pricing and cost structure.

That is to complement a 25% reduction in headcount and comes after the outfit matched British Airways lease-adjusted EBIT margin of 15% in the third quarter just ended.

Also, and simply as a function of the above mentioned drop in fuel prices, the broker lifted its estimate for earnings before interest and taxes next year by 6% to €2bn.

For all of the above reasons, analyst N.Glynn hiked its price target on the shares to 654p from 618p previously, albeit while maintaining an outperform recommendation.

Liberum Capital and Shore Capital are reviewing their forecasts for Greggs after the bakery chain forecast annual profits above market hopes.

Greggs said on Monday that full-year profit in the 53 weeks to 3 January should be ahead of analysts' expectations after it benefited from milder weather, shop refits and new products in the 24 weeks to 13 December.

Liberum, which has a 'hold' on the stock with a 600p target price, had expected annual pre-tax profit of £53.8m against a consensus of between £52.1m and £55m.

It said it was putting its forecasts under review, adding: "We would expect consensus to increase by up to 5% today."

Meanwhile, Shore Capital, which has a 'buy' on Greggs with a 657p target price, said it also expected to upgrade its expectations.

The broker's Clive Black said: "We will liaise with the company as to the size of the upgrade to our forecasts, noting that management states that it still has to trade the last few weeks of the year, where inclement weather can still play a role. However, momentum appears good."

Shares in Greggs rose 29.5p or 4.5% to 686p at 10:06 in London.