Broker tips: Barclays, Pearson, RBS
Analysts at Jefferies hiked their target price for shares of Barclays from 209p to 244p on Monday, in anticipation of a higher rate of return on capital, share buybacks and after marking down their estimated cost of equity for the lender.
In their opinion, a 9.5% return on tangible equity by 2021, 9p dividend payout for 2019 (and progressive thereafter) and share buybacks carried out below 'book value' were all "under-appreciated" by the market, they said.
Their forecasts now called for share buybacks of £2.5bn in 2020 and 2021, which equated to 8% of its market capitalisation.
They also highlighted how Barclays's operating risk now received the same treatment as peers Lloyds and RBS, so that its 13.4% common equity tier one ratio was now comparable to those two rivals'.
"Following capital clarity at Q3 (the bank now receives consistent treatment on op risk so that it's 13.4% CET1 is now comparable with the likes of LLOY and RBS) and £1.4bn PPI charge, we believe it is now realistic to model buybacks relative to a 13.5% CET1 threshold," they said.
Furthermore, the risk/reward trade-off for the shares was now favourable, with 66.0% potential upside in Jefferies 'bull' case but only 33% downside under its 'bear' scenario.
"Return improvement and capital repatriation are the most visible they have been in 10 years. Risk/reward is asymmetric with 78% upside in a bull case v 33% downside," the analysts explained.
"Our 244p price target is derived using a Gordon Growth model and we reduce our [cost of equity] estimate to 11% from 12%."
Analysts at Berenberg lowered their target price on publishing and education group Pearson from 620.0p to 525.0p on Monday, stating the firm now appeared to be "bottom of the class".
Berenberg, which maintained its 'sell' rating on the stock, said 2019 had proved to be "another testing year" for Pearson investors and believed that 2020 could offer more of the same.
The German bank said that an accelerated deterioration in the higher-education courseware market would likely have a "significant impact" on the following year's numbers as well.
While Pearson downplayed the importance of higher-education courseware by focusing on its revenue contribution (of around 25%), Berenberg said the reality of the numbers was that it was a "much more important driver of profitability".
"We think management will guide cautiously when it provides its next update in mid-January," said Berenberg.
"Consensus is still too high for 2020 earnings, in our view, and even if the buy-side knows this, we think a raft of sell-side downgrades will maintain negative pressure on the stock."
Coupled with the absence of one-offs that benefited operating expenditures, tax and interest in 2019, and far lower incremental savings in 2020 than in the prior years, Berenberg added that earnings per share guidance could be in the mid-40p per share range.
"We maintain the view that current multiples do not reflect sufficiently the earnings deterioration of the group, and reiterate our Sell rating with a new price target of 525p."
Analysts at Morgan Stanley upped their target price and raised their recommendation for shares of RBS in anticipation of the effect of chief executive Alison Rose's targets.
MS said it expects Rose's targets to result in higher topline growth in the banking unit, an increased amount of room for cost cuts in its markets division and a reduction in the lender's capital requirements.
The new targets were expected to be unveiled on 14 February.
"Focus will be on restructuring of Natwest Markets, however we also believe RBS will show improving NII growth in 2020, and will announce a lower "go-to" capital target," analyst Alvaro Serrano said in a research note sent to clients.
All told, the analyst raised his estimates for the lender's earnings by between 4.0-9.0% for a greater than double-digit compound annual rate of growth in its earnings for 2019-22.
Serrano also expected RBS to raise its target for capital distributions.
"With conduct issues largely behind it, lower RWA pro-cyclically, pension deficit addressed and excess capital held in Ireland set to be repatriated, we believe RBS is in a position to lower its "go-to" CET1 from 14% to at least 13%. This will allow an additional £2bn of capital distribution equivalent to 7% of its market cap."
Changing hands on 1.0 times their estimate of its tangible book value and with a 2022 return on tangible equity of 12.0%, he, therefore, revised his target from 260.0p to 300.0p.
His recommendation for the shares went up from 'equal-weight' to 'overweight'.