UBS cuts Spirent Communications to 'neutral' from 'buy'

UBS downgraded Spirent Communications to ‘neutral’ from ‘buy and cut the price target to 84p from 95p.

The bank said it had upgraded the stock to buy as it felt the company was finally likely to see a recovery in its core Networks and Applications (N&A) business led by end markets such as 100G Ethernet and mobile infrastructure which could drive full-year group EBIT and margins higher after three years of deterioration.

It said that while N&A is recovering well, Spirent’s recovery in profit has been hampered by Software contract delays in data analytics. It also said profit was dented by the mix of business as wireless device testing suffers from poor end market demand, a shift to lower quality smart phones and greater competition.

Shares in Spirent Communications tumbled on Wednesday after the company warned that profits for the year will be materially below its expectations, as it posted a pre-tax loss for the first half.

UBS said there were still reasons to be cheerful about the stock, although not enough to remain buyers.

The bank pointed to a solid recovery in several core areas at key customers and the fact that management is acting in the long-term interests of shareholders by investing in multiple new product areas rather than prioritising short-term margins.

It also pointed to the company’s commitment to maintaining the dividend, which results in a yield of around 3% per annum.

At 1347 BST, Spirent shares were down 1.5% at 79.75p.