Broker tips: AB Foods, Vodafone, Oxford Instruments

Berenberg downgraded Associated British Foods to ‘hold’ from buy’, keeping the target price at 3,450p.

It noted that since it upgraded the stock to ‘buy’ in February, the share price has increased by 10% while consensus forecasts for 2016 earnings per share have fallen 15% due to a mix of FX translation and impact on margins in the short term for Primark.

Berenberg said it remained confident about the group’s long-term potential, in particular from the roll-out of the Primark concept across Europe, which it reckons is worth 2,750p per share standalone with further upside potential in the US.

However, with just 1% growth forecast for 2016, Berenberg said it was hard to see a catalyst for a stock trading on 31.5x calendar 2016 price-to-earnings that is still subject to volatility in commodities, with excitement over US Primark opening priced in.

“While we do not doubt ABF’s quality, the net downgrades (from commodity exposures and FX) have been frustrating and it will be another 12 months at least until we see the full benefits of solid double-digit EPS growth (fuelled by Primark) come through.”

Macquarie upgraded Vodafone to ‘outperform’ from ‘neutral’ and reiterated its 235p price target, saying the company was turning a corner.

“At last the operational outlook for Vodafone is constructive on a 12-18 months view. We believe the positive combination of European improving service revenue trends, growth returning to Europe, the end of Project Spring and a cost focus are likely to drive the share price.”

Macquarie said that in a continued low interest rate environment and after the FX turmoil of the third quarter, the outlook is more constructive.

The Australian bank said its target price reflects its outlook that Vodafone will be delivering 3.3% revenue growth in full-year 2015/16.

In the long term, Macquarie reckons capital intensity will be maintained at higher levels in order to sustain revenue growth, but said this will necessitate a change in the dividend policy.

Rather than the current 5.5% yield and 2% growth, it expects a move to 8p in full-year 2016/17 with a 3.9% yield, but with 5% growth thereafter.

Shares in Oxford Instruments fell sharply after Goldman Sachs downgraded the stock to ‘neutral’ from ‘buy’, noting it's trading close to the bank's unchanged 700p price target.

The brokerage said that since being added to the ‘buy’ list on 26 September 2012, the stock is down 49.4%, compared to the FTSE World Europe up 19.9%.

For full-year 2016, Goldman said it expects adjusted earnings before interest and tax of £43m, compared to Reuters consensus of £45m.

“Weak demand in both the nanotech tools and industrial products business have impacted the shares, and more recently signs of price pressure related to overcapacity in superconducting wire,” it said.

Goldman said the group has developed a strong portfolio in the area of nanotech tools. This is a niche market and while it is vulnerable to high short-term volatility, it could offer attractive long-term growth potential and/or strategic attractions for larger instrumentation suppliers, it added.