Broker tips: Supermarkets, Inchcape, Dunelm

2nd Oct 2009 13:14

Food price deflation is about to put a dent in the earnings of the major UK supermarkets if the experience of their US counterparts is anything to go by, reckons Citigroup.The US bank has slapped sell recommendations on Tesco, Sainsbury and Morrisons. Citi said high hopes at the beginning of the year for strong earnings growth at US food retailers Safeway, Supervalu and Krogers proved misplaced, as food prices tumbled, and the same thing could happen here.Citi is predicting a significant fall in food prices in September and reckons annual food price inflation will turn negative by the end of the year; back in February, the food price inflation rate was 11.4% in February.Panmure Gordon has raised its target price for car dealer Inchcape as a number of its major markets begin to show signs of recovery, and now reckons the shares are worth buying.The broker's new target price is 42p, up from 29p previously, with the change prompted by an upgrade to its earnings forecasts for the current fiscal year and the next two years.'We upgrade our bottom of the range 2009E EPS [earnings per share] forecasts by 46%, 2010E by 40% and 2011E by 56%,' Panmure Gordon said. The broker expects the third quarter trading update on 28 October could provide a catalyst for other brokers to ratchet up their earnings forecasts.'We note that new scrappage schemes are either just starting to gather momentum or will shortly commence in countries such as Greece, Romania, and potentially Russia,' the broker said. Meanwhile, the 'China effect' seems to be having a palliative influence on the Australian market 'while car sales in Hong Kong have a 6-month lag effect with the Hang Seng index, which has also been strong of late.'Panmure Gordon has upgraded the stock from 'hold' to 'buy'. Dunelm, the home furnishings retailer, is not widely known inside the M25 area of London which gives it plenty of scope for expansion, reckons Singer Capital Markets.The out-of-town retailer has just 85 stores across the UK with many regions unrepresented. The chance to move into new areas without the risk of cannibalising sales from its existing stores represents 'the core driver behind the investment case,' Singer claims. The broker has a 'buy' recommendation on the shares.Dunelm has 'all the key building blocks' in place to expand, having invested well in infrastructure and logistics, and could open up to 15 shops per annum in the next three years, according to Singer's projections.