Broker tips: Ocado, WPP, Sainsbury's, Tesco

Ocado got a boost on Tuesday as Peel Hunt reiterated its 'buy' rating on the stock and lifted the price target to 610p from 570p, saying it could benefit from Sainsbury's tie-up with Walmart's Asda.

Peel said the key takeaway from Monday's news of a tie-up was the pressure they are facing from discounters and online, squeezing margins. As a result, they're promising further price competition, which could squeeze margins in the industry even further, Peel said.

"The circa 10% price cut on popular products announced by Sainsbury’s post-completion, while positive for customers, will further intensify competition and increase the loss-making potential of online offerings further, pushing the new top three to focus on securing their traditional offline models.

"Ocado should take advantage of this distraction. Moreover, smaller players such as Marks & Spencer and Co-op, not restricted by the Morrisons deal, should come on board with Ocado Solutions."

Separately, the brokerage highlighted strong Glassdoor/Trustpilot performances from Ocado and said it was gaining more confidence in the operational leverage following a review of its deal model.

Peel noted that 54% of Ocado Trustpilot reviews were "excellent" compared to 29% at Tesco and 15% at Asda, while Ocado had an overall score of 6.8 compared to 2.9 for Tesco and 1.1 for Asda.

WPP’s problems are not over after sales beat expectations in the first quarter, according to analysts at Berenberg.

The world’s biggest advertising company, which parted company with founder Martin Sorrell in April, left annual profit guidance unchanged on 30 April as it reported net sales better than analysts’ forecasts.

Berenberg said the market’s positive response was understandable after 12 months in which WPP disappointed investors several times. But profit estimates will get worse before they improve, they said, maintaining a ‘hold’ recommendation and 1,275p price target for WPP.

Recent results from WPP’s rival Publicis indicate advertising agencies are not in terminal decline, as some investors fear. But for WPP to start growing again it has to go through a hefty programme of restructuring, investment and disposals that will suppress earnings.

"WPP is not out of the woods yet, with tougher UK comps to come, a weak US trend likely to continue (the company’s highest-margin region) and management admitting that no assumption has been made for any major client account losses (despite Ford’s global creative review being underway, among a number of others),” the analysts said in a note to clients.

Heading back to the supermarket sector, there are too many uncertainties hanging over Sainsbury’s proposed acquisition of Asda to justify the price and Tesco is a better bet, JP Morgan analysts said.

Sainsbury’s agreed purchase of Asda from Walmart, comprising £3bn cash plus shares, could be a good deal for both sides, the analysts said. But, after Sainsbury’s shares rose 15% following the announcement, the price assumes the deal is low-risk when it isn't, they said.

The assumptions include:

The deal gets regulatory clearance

The combined company will not be forced to dispose of stores

Management executes the deal with no mistakes

Management achieves the target of £500m synergies by 2022

There is no certainty the Competition and Markets Authority will approve the deal and if the CMA requires store disposals there are no obvious takers, JP Morgan said.

Timing is also an uncertainty because a full CMA inquiry could take 15-18 months, according to the analysts, who kept their 'underweight' rating for Sainsbury's and increased their price target to 260p a share from 200p.

Tesco, whose takeover of Booker has been approved by the CMA, is a better bet for investors, JP Morgan said.

"We would rather buy Tesco, where there is no CMA risk, there is a new addressable market/avenue of growth and the combined businesses are in better shape."