Broker tips: Pearson, housebuilders, transport operators, The Gym Group

Pearson shares were downgraded by Exane BNP Paribas after an "unwarranted" rebound in the face of fresh concerns over the group's ability to return to growth in North America this decade.

Exane, which downgraded Pearson to 'underperform' and cut its target price to 550p from 600p, said it was increasingly sceptical about North America in light of new concerns about the sustainability of double-digit growth in the US virtual schools business, the London-listed group's fastest growing segment in the continent, accounting for roughly 6% of group revenues.

The bank's analysis of the penetration of Open Educational Resources in US schools -- free online learning materials that have put a big dent in its business -- suggested a "rising risk" to US school courseware revenues, which are about 9% of group sales, with more than one million K12 students now in schools which are in the process of implementing an OER policy.

Moroever, online language learning platforms "are gaining share against traditional language schools and English courseware businesses, which does not bode well for Pearson’s English revenue growth".

Exane analysts Sami Kassab and William Packer cut their 2018 estimates for adjusted earnings per share by 5% to 45.7p and 2019 EPS by 7% to 45.6p, so they now stand at the low end of guidance for the current year and 5% below consensus EPS for 2018.

Pearson shares, which also went ex-dividend on Thursday, fell 4% to 622p by 1100 BST.

Housebuilders

JP Morgan Cazenove adjusted ratings on a number of UK housebuilders on Thursday, noting a solid performance from the sector year-to-date, on a combination of earnings guidance upgrades, confident commentary from companies, improved housing market data, and a benign white paper.

The bank upgraded Countryside Properties to 'overweight' from 'neutral' on valuation as it now sees 15% upside potential to its unchanged price target of 275p.

JPM noted the stock has underperformed the sector by 25% since mid-2016.

"We continue to believe that Countryside’s earnings are more cyclical than generally perceived and, therefore the stock’s performance should have been more closely correlated with the sector year to date."

It also upgraded Redrow to 'overweight' from 'neutral', lifting the price target to 600p from 500p.

It said that despite upgrading earnings guidance twice already this year, Redrow has not outperformed.

"Now that the group has officially ruled itself out of another bid for Bovis, we believe investor focus should fall on the standalone valuation."

The bank downgraded Bovis Homes to 'neutral' from 'overweight' and slashed the price target to 889p from 1,070p.

Commenting on the news on Wednesday that Galliford Try has abandoned its plans to make a formal bid for Bovis, it said: "The breakdown of the second merger discussion in a week leaves an absence of potential acquirers, however in our view, the relatively limited synergies were unlikely to provide very material upside from current levels."

JPM added that the appointment of Greg Fitzgerald as chief executive officer should be viewed positively, given his strong reputation and significant housebuilding experience.

It cut Crest Nicholson to 'neutral' from 'overweight', keeping the price target at 590p.

Overweight-rated Persimmon and Berkeley remain its top picks, while in the small caps space, it favours Bellway and Redrow.

Public transport operators

Shares in Southern Rail owner Go-Ahead Group were lifted, while those in Stagecoach slipped lower on Thursday as broker Liberum shifted its stance on UK public transport operators.

Liberum upgraded Go-Ahead to 'buy' from 'hold' as the valuation traded at a discount to the bus division alone, with the dividend yield also looking attractive.

But Go-Ahead's target price was cut to 1,975p from 2,100p as analysts remained cautious on rail -- and the Govia Thameslink franchise in particular -- and were a new caution on the London bus business due to a read-across from Stagecoach's wage pressures and heightened competition.

Stagecoach was downgraded to 'sell' from 'hold' and the TP trimmed to 185p from 215p in spite of tentative signs of stabilisation in revenue trends, as risks were not felt to be reflected i nthe valuation.

"The group continues to face both short-term trading pressures and long-term structural challenges across all of its businesses," analyst Gerald Khoo wrote, also cut his earnings estimates again.

"The East Coast rail franchise remains a material negative for the investment case, despite potential scope for contract amendments," he said, believing that is "increasingly unlikely" the company will be able to deliver a self-help turnaround in revenue growth and profit at the franchise.

Khoo kept his 'buy' recommendations on top pick FirstGroup and National Express, with both deriving the bulk of their earnings from non-UK operations, "benefitting from diversification, limited exposure to a still uncertain UK economic outlook and currency translation tailwinds to earnings".

The Gym Group

Shares in The Gym Group gained on Thursday as analysts at Barclays upgraded the “fastest growing stock” in its coverage.

The Gym Group was upgraded to ‘overweight’ from ‘equal weight’, although its price target was lowered to 230p from 243p reflecting a peer group de-rating, as Barclays believes that the company’s fundamentals are on track and its growth is attractive.

The company offers the highest growth rate within Barclays' coverage universe, with an earnings before interest, tax, depreciation and amortisation (EBITDA) and earnings per share compound annual growth rate of 20% over the 2016 and 2019 financial years.

Barclays' positive stance is based on its proprietary pricing analysis which indicated that monthly membership costs are gradually rising, suggesting few signs of oversupply.

EBITDA per mature gym increased in 2016, which allayed concerns that incremental sites were generating poor return on capital employed (ROCE), and the company’s estate was seeing falling ROCE as new industry supply enters.

Barclays is most concerned about over supply so it has considered potential profit and loss dynamics if the company stopped expanding at the end of the 2016 financial year. The bank estimated that the 34 ‘new’ sites that have been open for less than two years could generate £16m of EBITDA at maturity compared to the current EBITDA of £5.9m.

The bank said that The Gym Group’s share price has fallen substantially in the past year - down about 34% from its April 2016 peak compared to the FTSE All Share which was up 14% - but there has been no obvious change in its fundamentals.

Barclays believes the fundamentals have improved and, although consensus forecasts have fallen since the initial public offering in November 2015, its forecasts are largely unchanged, apart from the increase in share-based payment guidance.

Even though the bank cut its price target, it sees around 26% upside potential to the price target.