Broker tips: Electrocomponents, Ryanair, Ashtead, Vodafone

Electrocomponents surged on Tuesday as Jefferies upped the stock to 'buy' from 'hold' and UBS pushed it up to 'buy' from 'neutral'.

If you're searching for companies that have de-rated in the cyclical sell-off with a safe balance sheet, impressive management and significant self-help tailwinds, then Electrocomponents is for you, Jefferies said in a note.

It said the company could deploy £500m surplus capital over the next two years, has numerous self-help initiatives under a new management team, and the price-to-earnings has flipped from highest in the peer group to the second lowest over the last 12 months.

Jefferies, which cut its price target on Electrocomponents to 700p from 740p, said that in the absence of economic recession, the stock's valuation offers an attractive risk/reward.

UBS was also bullish on the stock after it de-rated around 40% since August 2018 on the back of slowdown and macro fears.

The bank, which reduced its price target to 650p from 770p, said that although its estimates are 2-3% below consensus, it reckons 12.5x price-to-earnings and 10x EV/EBITA already prices in organic growth turning negative and earnings growth stalling.

Analysts at Berenberg downgraded low-cost carrier Ryanair from 'hold' to 'sell' on Tuesday as part of a note on the broader sector.

Berenberg's said its revised bottom-up capacity model suggested elevated short haul pricing risks, indicating a potential "value trap" for low-cost carriers exposed to stalled earnings momentum.

The German broker expects short-haul capacity to accelerate 7.5% in 2019, despite anticipating the challenging fare environment seen at present to continue.

On Ryanair, Berenberg said industry capacity growth had continued to offset its ability to manage cost inflation, leading it to drop its target price on the firm to €9.75 per share from its previous €12.60 mark.

"We downgrade Ryanair to 'sell' as it faces sustained competitive pressure to pricing, while its cost progress remains highly uncertain."

The broker also highlighted non-headline fuel costs as a factor in its decision to lower its 2019 net income estimate to below Ryanair's guidance range of €1.1bn-1.2bn.

"We expect continued pressure on valuation while the market awaits more clarity on the timing and amplitude of labour cost inflation. We expect another down year in net income in FY 2020, and see fewer paths to growth."

UBS upped its stance on equipment rental company Ashtead to 'neutral' from 'sell' on Tuesday, lifting the target price to 1,800p from 1,700p as it said fears about a slowdown were priced in.

The bank said that while Ashtead's performance has been significantly ahead of its original 'sell' thesis back in December 2016, the shares have fallen by around 35% since early-cycle data started to deteriorate in August last year.

UBS said it sees downside risks to equipment rental demand this year amid weakening construction indicators, linked to tariffs. In addition, it reckons equipment rental supply is continuing to expand. The bank also pointed out that Ashtead faces tough hurricane-related comps for the next two quarters.

"While Ashtead continues to take market share and drive rental penetration, we therefore expect performance to slow over the next 12 months.

"However, after a circa 35% de-rating Ashtead is already pricing in 'end of cycle' risks; given our base case is not a full economic downturn, we believe risk/reward looks balanced."

Vodafone and its dividend are "vulnerable", RBC Capital Markets said as it downgraded the telecoms giant's shares on Tuesday.

RBC cut its rating to 'underperform' from 'outperform' with the target price slashed to 125p from 260p.

While FTSE 100 group's "frenetic" restructuring of its portfolio has made the company "more European and converged, but also vulnerable".

Vodafone's underlying markets around Europe remain "challenging" and despite synergies and cost cutting from the restructuring, there is "very little financial headroom".

In November the board said it was reviewing the best strategic and financial direction for a newly created "virtual internal tower company", which could raise some cash from a sale.

Even given this, RBC said the group still "faces a threat from 5G spectrum".