Goldman Sachs downgrades Burberry, sees limited near-term upside

Goldman Sachs downgraded Burberry to ‘neutral’ from ‘buy’ and cut the price target to 1,550p from 1,690.8p.

It noted the shares are up 93.1% versus the FTSE World Europe up 21.3% since it added the stock to its ‘buy’ list in May 2010.

“Given the lack of improvement in growth momentum and uncertainty over costs, we expect limited near-term upside for the shares.”

GS said while the deterioration in like-for-like trends to -5% in the fourth quarter from +1% at the nine-months mark is representative of a tougher luxury demand environment due to declines in tourist spend in Europe and weak demand in the US, the latest pre-tax profit guidance for FY17 of around £405m suggests more severe operating deleverage.

“While we believe Burberry’s differentiated brand, growth and digital strategy will continue to drive top-line outperformance relative to its peers over the medium term, this strategy will continue to weigh on profitability particularly given the tougher trading conditions expected in the near term.”

The bank said given the fundamentals, the current valuation of 19x on its new estimates for full year 2017 price-to-earnings offers limited room for a re-rating. Still, the potential for a Burberry takeout remains, said GS, which assigns a 30% probability within its M&A framework.

At 0957 BST, Burberry shares were down 0.6% to 1,284p.