Broker tips: Sainsbury's, Smith & Nephew, Carnival
Analysts at ShoreCap raised their recommendation on Sainsbury's shares from 'sell' to 'hold' on valuation grounds, but shied away from recommending a 'buy' following the recent loss of Argos Sainsbury boss, John Rogers, and the likelihood of a flat medium-term earnings trajectory for the grocer.
On the upside, changing hands at just 10.6 times their estimated earnings for the year to March 2020 and an enterprise value-to-earnings before interest, taxes, depreciation and amortisation of 4.1, now was the correct moment for an upgrade.
As well, there was a small increase in confidence in the grocer's ability to deliver on profits in the short-term.
Furthermore, plans to reduce net debt by £750.0m over the current year meant that the payout would be "more secure, visible and so sustainable."
However, the loss of Rogers to WPP meant that management would have to do without someone of "considerable intellect, talent and experience".
The analysts were also "nervous" about the grocer's ability to rebuild its second-half profits via the investment that it carried out in the first six months of the year.
"Is the prospect of flat medium-term earnings a reason to Buy the shares?," they mused out loud.
"Maybe falling markets could make Sainsbury's shares more interesting?"
Analysts at Berenberg retained their 'buy' rating on medical equipment manufacturer Smith & Nephew on Monday but slightly lowered their price target on the group from 2,265p to 2,250p.
Berenberg said the solid performance of Smith & Nephew's shares so far in 2019 had been largely been driven by investor confidence in a return to overall revenue growth in line with the 4% average growth seen in its various end-markets.
In this sense, the German bank conceded that all the "low-hanging fruit" had already been picked but added that there was "plenty more left on the tree".
Berenberg stated S&N's 2020 adjusted price-to-earnings ratio of 21.0x was not yet reflecting above-market revenue growth, in its view, and neither were consensus estimates.
"Driven by improving operational execution and recent product acquisitions, we think above-market growth is exactly what the company will deliver in the coming years. In turn, we expect upgrades to consensus earnings expectations," said Berenberg.
However, they did add one caveat, "poorly received or poorly executed large-scale M&A remains the key risk for the shares, in our view, but thus far the new management team has shown good discipline."
Berenberg adjusted its earnings per share estimates slightly, lowering them 0.2-0.5% per annum as lower interest expense expectations look set to only partly offset FX effects but highlighted the fact that its £22.50 target price still reflects a "healthy" 19% potential upside.
HSBC slashed its target price for shares of Carnival from 5,300p to 3,500p - downgrading its recommendation from 'buy' to 'hold' - after the cruise line operator lowered its outlook for yield growth, management's commentary around worsening bookings for the financial year 2020, increasing capacity growth relative to its peers, and risks to the firm's share buybacks.
The investment bank's analysts also called attention to how the shares seemed impervious to positive trading updates from peers, "suggesting a widening divergence in performance between the operators".
Regarding the share buybacks, at the time of writing the company's leverage was at 2.3 times HSBC's estimated earnings before interest, taxes, depreciation and amortisation for Carnival in 2020, so that a 120 basis point drop in net yields would push leverage to 2.5 times or the top end of management's target range of 2.0-2.5 times.
On the back of that lower yield growth outlook, weak booking commentary and higher capacity growth versus peers, HSBC also lowered its target price-to-earnings multiple for Carnival's shares from 15.0 to 10.0.
Although that was below the shares' longer-term average price-to-earnings multiple of 15.0, "wider macro uncertainty and increasing market supply warrant the discount", HSBC said.
"[Carnival] has traded as low as mid-single-digit P/E multiples during the low end of the cycle," it noted.