Broker tips: JD Sports, B&M, Diageo, Reckitt

RBC Capital Markets has reiterated its positive stance on AB Foods, JD Sports, WH Smith and B&M, saying that consumer buying behaviour in the US paints a promising picture for the London-listed value retailers.

Although all four companies don't have significant operations in the US - with the exception of JD Sports - RBC highlights the recent outperformance of discount and off-price retail in the current operating environment.

The news follows second-quarter earnings season by US-listed companies, which indicated an improved outlook for the second half and beyond.

"Following a softer start to the year, this round of results has generally come in ahead of expectations for US consumer discretionary names," the broker said in a research report on Monday. "We note a particularly strong performance from the likes of TJX and Wal-Mart, with strong exit rates (helped by back-to-school spend). We think this speaks to strong engagement from consumers with discount exposure."

"We've seen similar trends playing out in Europe, hence our preference for discount names with relatively undemanding valuations," RBC said.

This readacross is positive for Primark owner AB Foods and B&M, in particular, RBC says.

Meanwhile, JD Sports is the most exposed to the US region, which comprises around 30% of its group revenue, followed by WH Smith, which has roughly 25% sales exposure.

RBC maintained its 'outperform' ratings on all four stocks.

JPMorgan has kept its 'overweight' rating on UK-listed consumer goods and staples stocks Diageo, Reckitt Benckiser and Imperial Brands, saying the companies are "well positioned" going into the second half of the year.

In its review of the wider European staples sector following recent second-quarter and first-half results, JPMorgan said two thirds of companies beat expectations with sales and margin figures, while also giving optimistic outlooks. This showed that they are able to manage slowing inflation along with rising margins.

"While EPS have seen the headwinds from FX, better top line and margin have led to slight increases in our organic EBIT growth and should be supportive to momentum in H2," the bank said.

The European staples sector currently trades at 20 times 2024 earnings on average at a 58% premium to the market, down from a 90% premium last autumn.

"While we note the sector underperformance year-to-date due to macro (rising bond yields) and preference for cyclicals, we think the sector is well set for an outperformance given: 1) positive H2 EPS momentum from balancing top line deceleration and margin increase, and 2) appealing relative valuation."

"This should benefit quality names at a reasonable price," JPMorgan predicted, highlighting UK names Diageo, Reckitt Benckiser and Imperial Brands among other picks across Europe.

All three stocks were making small gains on Monday morning in London.

Berenberg has raised its target price for Glanbia after the Irish performance nutrition and food manufacturer's forecast-beating interim results last week, as strong margins make up for declining volumes.

The broker lifted its target from €16.30 to €17.40, keeping its 'buy' rating for the stock, which was up 0.5% at €15.10 on Monday morning.

Glanbia reported on Wednesday that first-half volumes were down 2% year-on-year, much better than the 4.2% decline expected due to a better-than-estimated performance in Nutritional Solutions. Margins rose 110 basis points to 7.2%, ahead of the consensus forecast of 6.6%.

One sore spot was the SlimFast division, where the year-on-year sales decline worsened from -28.3% in the first quarter to -33.8% in the second.

"Despite brand investments and retailer support for the brand refresh, the SlimFast brand – and the diet category overall – have not regained momentum and some US retailers are now reducing category shelf space in the short term, which will reduce distribution for SlimFast into next year," Berenberg said.

Nevertheless, Glanbia lifted its guidance for margins in its Performance Nutrition department, as a strong performance in higher-margin brands like Optimum Nutrition and Isopure offsets weakness in SlimFast.

"We think that Glanbia has a high level of protection from private label, due to its exposure to sports nutrition, weight management and vitamins. While not immune to brand downtrading, sports nutrition users in particular exhibit above-average levels of brand loyalty."