Broker tips: Dr Martens, Diageo, M&S, Next and Sainsbury's

22nd Apr 2024 15:21

(Sharecast News) - RBC Capital Markets cut its price target on Dr Martens on Monday to 65.0p from 85.0p as it reduced estimates following the bootmaker's FY25 guidance.

The bank said that despite the recent sell-off in the shares, it reckons it's too early to turn more positive on Dr Martens, given the stock remains in a "vicious" earnings downgrade cycle following its fifth profit warning.

"New CEO/CFO will likely undertake a detailed review of the business in the next 6-12 months, and above all else, drastic change is required, starting with financial discipline," it said. "It is difficult to quantify a steady-state margin for DOCS at this stage and which may require right-sizing its cost base."

The bank, which maintained its 'sector perform' rating on the shares, said it was reducing its FY25 EBIT estimate by 45%, its revenue forecast by 9% and its EPS forecast by 58%.

Diageo's stock was underperforming the wider market on Monday, with comments from Citi likely weighing on sentiment after the bank said it doesn't see upside despite a big drop in the shares over the past year.

The bank maintained a 'neutral' rating on the stock, which has fallen by 7% over the past six months and 24% over the past 12 months.

"The absence of new 2H24 trading negatives (especially in US spirits) has provided some comfort to investors and driven the stock from recent lows," said analyst Simon Hales.

However, the bank has cut its earnings per share forecasts over the next two years by 1.2% and 2.3%, respectively, due to currency movements and a lower association contribution.

"With [second-half] GBP-related FX tailwinds likely to unwind in 2025 and some risk of further reported EBIT trimming from biological asset revisions (agave), we think it is still tough to make a compelling case to own spirits/Diageo at present," Hales said.

Jefferies upgraded its stance on a host of UK retail stocks on Monday, with Marks & Spencer, Next and Sainsbury's all upgraded to 'buy' from 'hold'.

On M&S, for which it has a 310.0p price target, Jefferies said it thinks the company is now a far stronger business than was historically the case, with its newfound strength built on an expansion of its food offering, which was "clearly resonating strongly".

As far as Next is concerned, Jefferies said shareholders had benefited in recent years from the group's "remarkable" ability to squeeze out resilient profit performance in its highly mature domestic position.

"Our more constructive view of the UK consumer cycle results in us now estimating a NXT profit before tax delivery for the coming year some 2% higher than the group's guidance and 1% ahead of consensus," it said. "What is more material, however, is the possibility of investors more fully embedding the expanding tam of the group. And with it allowing for a new valuation debate that transcends the historical boundaries of a quintessentially British UK brand."

On Sainsbury's, the bank said fears around an excess capex burden limiting free cash flow upside have provoked intense investor concern since the capital markets day in February.

"We believe this overstates the risks and overlooks the positives emerging from the most supportive competitive backdrop in UK grocery in decades," it said. "SBRY in particular have outlined a multi-pronged approach to capitalising on this situation. As we noted after the CMD, the plan is to enable margin expansion through volume growth and opex control.