Broker tips: EasyJet, Rentokil, Meggitt

EasyJet flew higher on Tuesday after Cantor Fitzgerald upgraded the stock to ‘buy’ from ‘hold’ and lifted the price target to 1,300p from 1,200p.

The brokerage said EasyJet’s low-cost business model is resilient and has generated strong profits and taken significant market share in previous difficult macroeconomic environments.

It noted the stock is down 40% year-to-date due to concerns about trading, disruption to operations and Brexit.

“But we think that these concerns are overdone and the stock is oversold. We believe that travel spend across Europe will be more resilient than some investors fear.

“Moreover, EasyJet can use its financial strength to discount aggressively and build share. Our conservative forecasts build-in a weaker pricing scenario.”

Cantor added that the stock is trading at a 24% discount to its five-year average price-to-earnings.

Credit Suisse raised its target price on Rentokil to 235p from 225p on Tuesday and reiterated an ‘outperform’ rating for the pest control business.

The Swiss bank lifted its earnings per share estimates on Rentokil for fiscal years 2016-2018 by 3-5%, reflecting foreign exchange benefits, a lower tax rate and lower interest charge.

“We think that a stable set of core businesses (notably Pest Control and Hygiene) and strong cash generation will allow it to continue to reinvest excess cash into M&A, particularly in the Pest Control division,” said Credit Suisse.

Pest Control now accounts for over 50% of revenues, including the recent acquisition on Residex.

Credit Suisse also believes Rentokil could take market share in the North American market as it benefits from its scale and brand relative to the numerous smaller operators and deepens its penetration within the National Accounts market.

“As market share grows we expect the underlying business to continue to grow margins.”

Meggitt shares gained on Tuesday as JP Morgan upgraded the aerospace engineer to ‘neutral’ from ‘underweight’ and raised its target price to 445p from 395p.

The upgrade came shortly after news that activist investor Elliott Capital Advisors bought a 5.2% stake in the business which last week reported a plunge in pre-tax profits amid a challenging market.

“We upgrade the stock to ‘neutral’ and increase our multiples-based December 2016 price target to 445p from 395p, reflecting the higher possibility of either: (1) internal changes in Meggitt’s strategy; or (2) merger & acquisition activity,” JP Morgan said.

JP Morgan believes the share price will recover from its slump following the announcement of the investment. The share price plunged 40% in October when Meggitt issued a profit warning.