Broker tips: Shire, Ocado, Diageo

Shire's valuation makes no sense and investors should buy shares in the UK pharmaceuticals company, according to analysts at Societe Generale.

The analysts said they were an "outlier on consensus estimates" on Shire because of other analysts' concerns that its haemophilia and severe facial swelling businesses are not sustainable and that the company cannot service its debts without its ADHD division.

"We strongly disagree," the analysts, led by Justin Smith, said in a note to investors. They urged clients to emulate Berkshire Hathaway's Charlie Munger "by trying to be consistently not stupid instead of trying to be very intelligent".

Market values suggest Shire's haemophilia business is worth £20 a share and the ADHD division is worth £10 a share. That leaves the rest of Shire's businesses trading at a price to equity ratio of three times and "this is simply unjustifiable", the analysts said.

The analysts reiterated their 'buy' recommendation and target price of £8.

Credit Suisse upped its share price target to 600p from 480p for Ocado and reiterated its 'outperform' rating as it now expects "at least two" more third-party deals to be announced over the next 12 months.

Ocado earlier this month signed up its second major international customer less than two months after the first, with Canada's Sobey, with upfront fees upon signing and during the development phase, with ongoing payments linked to capacity and service criteria.

The Swiss bank noted that the Canadian deal uses the same contract structure as the contract with France's Casino signed at the end of November, with exclusivity for as long as a pre-determined capacity growth profile is met.

"We see this as compelling for both parties; partners can leverage the exclusivity while Ocado gets visibility without having to juggle multiple, potentially conflicting installations in any one country."

With share prices of both Casino and Sobeys climbing since their deals with Ocado, this is seen as providing "comfort" for the management teams and boards of potential partners.

The analysts also said they "don't agree with those who view Ocado as expensive" as the FTSE 250 company's shares trade at very high near-term multiples but this is "consistent with its growth profile and back-end weighted cash flows".

Diageo was "reluctantly" downgraded by RBC Capital Markets to 'sector perform' from 'outperform', with the price target cut to 2,400p from 2,600p.

RBC said it has been a long time since its recommendation depended not on what it anticipated about the trajectory of Diageo’s "often erratic" financial performance, but what multiple to apply to that increasingly predictable financial performance.

"Diageo’s business is in a good place and executing competently, but the shares' valuation reflects this."

The bank had been hoping that good interim results would allow it to bump up its forecasts and price target. Although the results were good, as hoped, RBC edged down its forecasts and adjusted present value-derived price target, meaning there was little alternative but to downgrade the stock.

While the company is in enviable position, with its biggest market remarkably robust compared to other categories and cash flow improving, it's not improving as much as the bank had hoped.

"In our view there’s plenty of scope for both working and fixed capital to be managed more tightly, but we think investment will be less aggressively curtailed than we previously anticipated. Cash conversion, although much improved, looks set to remain in the bottom half of a peer group of consumer staples businesses."