Broker tips: BP, Shell, Royal Mail, Rotork

Analysts at Barclays expect that shares of the European oil majors will re-rate as more evidence emerges going into year-end and the start of 2018 that the oil industry has 're-set' in order to be able operate in a $50 a barrel of oil environment.

Indeed, in their opinion companies had already done so, despite which investor positioning in the sector was essentially unchanged in September.

That was also despite a "rally" in the macroeconomic environment.

This was the main finding of the bottom-up analysis conducted by their European equity strategy team of fund filings, with both global and European active funds found to be 'underweight' the sector.

Investors also seemed to be ignoring the fact that the energy sector was offering near to the fattest premium on dividends to the market in over 30 years.

Barclays also believed the more favourable landscape for integrated oil companies would lead several to remove their dilutive scrip programmes in 2018.

For all of the above reasons, the analysts reiterated their 'overweight' stance for BP and Royal Dutch Shell - naming the former as its 'top pick' - and their respective target prices of 675p and 2,850p.

Royal Mail was under the cosh on Tuesday as Credit Suisse downgraded the stock to 'underperform' from 'neutral' and cut the price target to 325p from 492p, pointing to worsening letter revenue trends and labour costs.

The bank said it expects worsening letter revenue trends and a costly labour deal to render 2018 earnings unsustainable, and it does not expect free cash flow to cover dividends from FY21. It cut its FY18/19/20 EBIT estimates by 5%/18%/31% to £515m, £444m and £382m, respectively.

Credit Suisse said there are two factors behind its view that letter revenue trends will weaken. Firstly, it noted that RBS, Santander and the UK government are acting to cut mail volumes.

"Our data suggest that cost savings from government digitisation initiatives are still to materialise, and history shows that the Danish and Dutch governments' digitisation initiatives coincided with accelerating mail volume declines."

Secondly, it pointed out that internet use is rising fast among adults over 65, reducing the need for letters.

In addition, labour negotiations will add pressure to the stock, with around 3% wage inflation likely.

Goldman Sachs downgraded its stance on engineer Rotork to 'neutral' from 'buy' following recent outperformance, which it said limits upside to its unchanged price target of 280p.

The bank noted that since being added to the buy list in January, the shares are up 9% versus the FTSE World Europe up 12%. In the last two months, the stock is up 18% thanks to confidence in 2017/18 consensus estimates, supported by improving sentiment and competitor read-across, and higher oil prices.

"That said, we think recovery for some end markets remains uncertain, not least for original equipment in downstream / midstream Oil & Gas and power. We like Rotork as a business but on recent share price strength see better opportunities elsewhere."

Goldman said it continues to expect organic sales growth of 3%/5%/5% in 2017/18/19, predicated on inflecting order intake and positive signs in upstream, water and general industrial end markets.

The bank pointed to the fact that there is uncertainty surrounding the appointment of a new chief executive officer, with a search underway but a new boss unlikely to start before the first or second quarter of next year. "As such, Rotork’s long-term evolution remains uncertain and significant cost-tackling measures are unlikely to be enacted in the short term."