Broker tips: HomeServe, Tesco, Astrazeneca
Barclays upgraded HomeServe to 'overweight' from 'equalweight' on Thursday but cut its price target on the shares to 1,160.0p from 1,200.0p.
The bank said it's been sitting on the fence since the negative share price reaction to the HomeServe's full-year results in May, weighing up which way to jump and stating that the company's discussions with investors indicated that it divides opinion perhaps more than any other stock in its coverage.
"Common themes in our investor discussions include: (i) concern over when the UK will stabilise; (ii) US maturity; (iii) how realistic Checkatrade targets are; (iv) poor cash conversion; and (v) management's capital allocation.
"We analyse these issues in detail, and while we remain sceptical of Checkatrade's long-term potential (a view reinforced by analysis done in collaboration with our Data and Investment Sciences teams), we still expect it to be profitable by FY24, which together with UK profit stabilisation at around FY22 levels and HSD profit growth in the US (with possible upside from potential M&A) would deliver a three-year base case earnings per share compound annual growth rate of 10%."
Barclays noted that earnings growth alone was not enough, however, with improving free cash flow conversion and return on invested capital also essential to a re-rating.
"We forecast improvement in both these metrics, although this is dependent on any future Home Experts investment being justified by evidence of improving returns on investments made to date."
Analysts at ShoreCap reiterated their 'buy' recommendation on Tesco shares, telling clients they anticipated "strong" first-half numbers.
ShoreCap revised their estimates for Tesco Retail's full-year earnings before interest and taxes higher by approximately 5% despite the grocer showing "understandable" caution when providing guidance.
The analysts also expect the company to refresh its group capital allocation strategy at its upcoming interim results presentation on 6 October - although no distributions were expected to begin at that time.
ShoreCap also highlighted that margins over the half had been "robust" - particularly in fuel - and that warm weather had boosted an already solid summer.
UK like-for-likes were seen rising at a broadly similar pace in the second quarter to the 0.5-1.0% clip seen over the first three months of the year, while full-year sales were now seen coming in at approximately £60.66bn, with adjusted profits before tax of £1.98bn and earnings per share of 19.8p.
Analysts at Berenberg raised their target price on drugmaker AstraZeneca from 9,500.0p to 10,000.0p on Thursday following the firm's second-quarter earnings results.
Berenberg stated AstraZeneca's second-quarter results brought about an expected earnings guidance upgrade, driven by the inclusion of Alexion earnings following the deal's closure and "a somewhat unexpected return" of the debate on where the group's expanding operating margin will settle.
"Friction exists between the highly positive margin drivers – of a shift towards specialty care and blockbuster status for new launches – and the negative margin constraints from profit shares, primary care exposure and investment in R&D," said Berenberg, which noted that its return on R&D investment analysis supported management's plans to reinvest profits into the pipeline.
The German bank also said through its "intense period of patent expiries", AstraZeneca supplemented its operating profit with non-core disposals and pipeline collaboration revenues. At its low point in 2018, it estimates that the company's underlying operating margin was 13%.
However, Berenberg pointed out that AZN management executed a pipeline transformation, the rewards of which were now driving double-digit top-line growth and margin expansion from this exceptionally low base.