Broker tips: Burberry, Next, HSBC

Burberry shares were in fashion on Wednesday as Credit Suisse upped the stock to 'neutral' from 'underperform' and lifted the price target to 1,550p from 1,300p, saying the bear case is now behind us.

CS said that after being negative for over two years on the basis of a growth slowdown weighing on margins, the bear thesis has largely played out. The bank said the bulk of the earnings downgrades could be behind us, noting that consensus pre-tax profit forecasts have come down 20% in the last two years or 40% after adjusting for the positive sterling effect.

"We believe earnings risk is now more limited as the bulk of the £100m of annualised cost savings announced last year start to feed through PBT from FY18. We note that FY19 consensus PBT of £525m assumes almost no organic profit growth," it said.

Deutsche Bank bumped up its target price on shares of HSBC, hailing the restart of dividend payments in the US but cautioned that investors would need to be patient when it came to expectations for capital upstreaming from the States.

Analysts David Lock and Stephen Andrews welcomed the first dividends from HSBC's US unit in nearly 10 years.

While symbolic, they expected it would help fund future buybacks.

As well, they said the lender's first quarter results printed ahead of analysts' estimates, helped by a better performance from life insurance manufacturing and investment distribution.

However, commentary from management on the pace of capital upstreaming from the US was absent.

Lock and Andrews said it would still take more than three years for between seven to eight billion dollars of excess capital in the US to be returned to the holding company.

They penciled in $2.5bn of buybacks for 2017 with similar amounts for 2018 and 2019.

Next got a boost on Wednesday as Investec upped its stance on the retailer to 'buy' from 'hold' and lifted the price target to 4,750p from 3,900p.

It said that unlike peers, Next has been actively managing its portfolio over the last 10 years, something that is being overlooked by investors preoccupied by short-term trading.

"Next's estate is well-invested, and in our view margins appear sustainable, even if retail like-for-like sales continue to fall. Post FY18, profits should stabilise even if consumer demand remains weak, with some self-help. In our view, valuation doesn’t reflect Next's qualities as a well-invested business with strong and sustainable cash flows."

The brokerage highlighted the fact that Next's store portfolio has undergone more than just a refit. 53% of Retail's square footage didn't exist 10 years ago, even though store numbers have risen by just 12% since the start of full-year 2008.

In addition, Investec said new space is highly profitable and reflect an active property strategy, with new stores contributing around 40% more than company average. "Profitable new space continues to generate a profit buffer each year versus negative LFLs," it said.

Investec also said cash generation remains robust, with surplus returns looking secure.