Home Retail rallies 4% on Morgan Stanley upgrade

Home Retail rallied 4% on Tuesday after Morgan Stanley upgraded the stock to ‘overweight’ from ‘equalweight’ and raised the price target to 180p from 170p.

“We think there are some very interesting things going on at Argos at the moment. We don’t have high conviction as to how they will play out, but with the shares on 4x earnings before interest, tax, depreciation and amortisation and supported by 120p of cash per share, we think the risk-reward has become attractive,” it said.

The broker added that if management’s vision is realised, Argos could yet have a very attractive future.

MS noted that Argos is being repositioned to become an 'Amazon with stores'. The company's new hub-and-spoke network can service hundreds and potentially even thousands of small stores, offering 'click and collect' consumers a huge range of products at just a few hours’ notice, it said.

“With the initial Argos store-in-store implants in Homebase delivering sales densities of around £1,000 per square foot, we are genuinely excited about the trial of the concept in Sainsbury stores,” said the bank.

It added that the biggest challenge will be getting consumers to understand the changes underway and reappraise the brand.

“We aren't confident how the Home Retail story is going to play out over the next couple of years. However, we believe that there is scope for the shares to double if trading improves and investors buy into the transformation plans,” Morgan Stanley wrote in a research note e-mailed to clients.