Broker tips: Softcat, Experian, Rentokil Initial, GlaxoSmithKline, AstraZeneca

JP Morgan has reiterated its 'underweight' rating and 1,250.0p target price on Softcat following investor feedback on its recent downgrade, saying that the stock is still too expensive given the deteriorating outlook for the IT infrastructure and services provider.

Back in November, the broker cut its recommendation on Softcat from 'neutral', saying its slow earnings growth doesn't justify the stock's premium valuation.

"Following our recent downgrade to UW, we have spoken with many investors. We received limited pushback on our concerns of slowing organic growth, with investors acknowledging the challenging demand backdrop," said analysts. "Our more cautious view around Softcat's margin trajectory was a topic of debate, with longer-term investors particularly interested in our views around a worsening ROIC profile and potential risks to Softcat's track record of taking market share."

JP Morgan said that some investors had argued that the valuation was now more appealing given that the stock had underperformed, having fallen 8% since the start of October, compared with a 6.5% rise for the wider FTSE 250.

"We continue to see Softcat's ~23x [forward price-to-earnings multiple] (versus peers on ~17x) as elevated in the context of downside risk to consensus, slowing growth, and worsening return on invested capital," George said.

Citi has lifted its target price for data analytics and consumer credit reporting group Experian from 2,893.0p to 3,122.0p after a near-30% jump in the stock in the past two months but maintained a 'neutral' rating on the stock.

Citi said back in August that while US non-mortgage credit flows had moderated, the full impact of increases in credit card rates may not have been seen. Historical analysis suggests that credit flows may not have yet bottomed out, driving its cautious stance on Experian's outlook.

Since the start of November – which Citi pointed out was when the ten-year US Treasury yield peaked around the 5% mark – Experian's share price has surged by 29%. The outperformance means the stock's price-to-earnings ratio has risen from around 22x to 26x, near its peak see in the spring of 2022.

"Our new analysis of historical interest rate hike cycles suggests that it is likely that credit flows will trough after the Fed Funds rates starts to fall," Citi said. "With this in mind, we reduce our organic growth forecast for FY25E from 6.3% to 5.6%—below company-compiled consensus at 6.9%."

RBC Capital Markets cut its price target on Rentokil Initial on Wednesday to 575.0p from 610.0p as it downgraded forecasts for forex and a greater back-end loading of TMX synergies, but said it believes the long-term story remains intact.

The Canadian bank, which has an 'outperform' rating on the stock, said its earnings per share estimates for 2024/25 had come down by around 6-7%, while the forecast for 2026 has been reduced by 4%, largely due to forex.

"We expect management to come out with a credible plan to protect organic growth during the integration and, whilst there may be a cost to this - given the margin success of the initial pilots, we continue to see upside potential to the overall synergy number," RBC said.

The bank said that while it admits the risk profile has increased, it sees the de-rating as an attractive entry point for long-term funds.

Jefferies has upgraded its rating on GlaxoSmithKline to 'buy' and cut AstraZeneca to 'hold' as part of its review of the European pharma sector.

"We are positive on sector fundamentals but see 2024 headwinds: a relative scarcity of big catalysts, US political overhangs, and macro rotation," Jefferies said in a research note on Wednesday.

As for GSK, analysts said its net present value suggests the stock is "deeply discounted", as it lifted its recommendation and target price by 23% to 1,900.0p.

Jefferies' GSK estimates for 2026 and beyond were "well above consensus" as it reckons profits were only likely to face a "blip, not cliff" when HIV patents expire in 2028 due to the company's long-acting HIV injectables, vaccines, and new pipeline launches.

Turning to AstraZeneca, margin concerns were a downside for the stock, as Jefferies lowered its stance and cut its target pice by 12% to 11,000.0p.

Jefferies said: "We argue AZN is primarily a top-line growth and pipeline story, with our above consensus revenues mitigating EPS risk. However, margin clarity may be needed for stock upside and 2024 has fewer major pipeline catalysts."