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Broker tips: Diageo, BAE Systems, Victrex
(WebFG News) - Having underperformed its spirits peers so far this year, analysts at Morgan Stanley spied a buying opportunity in drinks-maker Diageo given its track record of solid organic sales growth and strong cash generation.
Morgan Stanley's proprietary US spirits wholesalers survey reassured the broker in regards to Diageo's potential for further market growth and for that of its brands, leading the analysts to reiterate their 'overweight' rating on the shares.
Among US distributors covered in the broker's survey, 50% of respondents were "optimistic" about the next six months, somewhat similar to its November survey, with the majority of distributors expecting low-single digit volume growth, with further improvement in the on-trade.
"The outlook for key Diageo brands (Johnnie Walker and Bulleit) remains strong, has improved for Crown Royal and Captain Morgan, and deteriorated for only Ketel One," said MS when discussing the outlook for Diageo's brands.
Diageo could plausibly close the gap with the market within the next twelve months on the back of brown spirits and tequila, while the drag from Ketel One and Ciroc vodka was seen as likely to fade, the broker said.
Also, considering its strong cash flow generation, Morgan Stanley expected Diageo to undertake a similar share buyback to its £1.5bn purchase back in March before the end of next year, which was not yet factored into the consensus' expectations.
No, it would not keep the company from being able to carry out further bolt-on acquisitions, Morgan Stanley said.
"With no sign of US slowdown, India growth bouncing back and the possibility of a further share buyback, we believe the valuation discount to peers offers a compelling buying opportunity," the analysts concluded.
BAE Systems shares are not fully reflecting the defence contractor's "much improved" growth outlook and supportive defence market, said Berenberg as it upgraded them to a 'buy' recommendation.
The investment bank expects growth to rebound and a re-rating for the shares, which have often traded at a discount to peers amid anaemic earnings growth in recent year, negative sentiment around its core Eurofighter programme, and a weak UK defence outlook.
"BAE's growth outlook is now much improved and the defence market remains supportive, factors that are not reflected in the current valuation, in our view," said Berenberg, where analyst Andrew Gollan has taken over coverage.
"We expect the shares to outperform over the next year driven by a higher rating on this stronger growth profile," he said.
Updating his forecasts resulted in upping the price target to 700p from 600p for shares that have fallen 3% over 12 months compared to the 9% gain for the pan-European sector and 44% surge for US defence peers.
Gollan estimated circa 75% of group revenues will be in growth mode from 2019, underpinned by key programmes, and margin expansion of close to 70 basis points over the next five years due to a change in product mix from the strong growth in electronic systems and improvement in other segments such as US platforms & services and cyber & intelligence.
A four-year EPS compound annual growth rate of 7% is forecast through to 2022 compared to a five-year historical rate of 2%.
Polymers manufacturer Victrex has had a good run, but as far as analysts at Berenberg were concerned, it was time to downgrade the firm to 'hold' as it was now fully valued.
After seeing shares rally roughly 20% since September, outperforming the European chemicals sector by over 15%, Berenberg dropped Victrex from its 'buy' rating as its stock had reached the price target of 2,700p.
"Investors have clearly warmed to a combination of volume-driven 2018 earnings upgrades and progress towards implementing the company's downstream pipeline," Berenberg's Tuesday morning research note read.
"But the absence of further upgrades and [the] prospect of FX-headwinds leaving earnings flat-down in 2019 leave little scope for a further re-rating, in our view."
Berenberg noted that Victrex's dividend yield of 4.6% was still "attractive" compared to the Stoxx 600 Chemicals average of 2.9%, but saw "limited upside" without any earnings upgrades from the drugmaker.
The analysts left their price target on Victrex unchanged, noting that while there was clearly scope for the company to re-rate further in the long term, especially if it delivers on its pipeline ambitions, FX and tougher comparable numbers are likely to limit the group's near-term upside.