Berenberg ups Sainsbury's to 'hold' in consumer review

Berenberg upgraded Sainsbury's shares to 'hold' and increased its price target for Marks & Spencer as the bank advised investors to concentrate on consumer companies with fundamental strengths rather than short-term earnings.

The start of 2021 and perhaps beyond will be heavily affected by Covid-19 lockdowns making 2021 earnings largely meaningless for many UK consumer groups, Berenberg said.

Berenberg analyst Owen Shirley and colleagues said for companies hit hard by lockdowns they would concentrate on financial strength and revenue run rates as restrictions are withdrawn.

Shirley upgraded Sainsbury's from 'sell' and raised his price target for the supermarket group to 214p from 183p based on reduced "headwinds" from Sainsbury's banking business and discretionary retail exposure through Argos.

"Our style remains focused on “quality”. In other words, we concentrate on businesses with strong 'moats', high returns, good margins and the potential to become much larger in time," Shirley wrote in a note to clients.

Berenberg said its top picks based on these criteria are Asos, Pets at Home and Ocado. Good businesses with low valuations are National Express, DFS and M&S, Shirley added, increasing his M&S price target to 160p from 125p.

The bank's least preferred stock are Domino's Pizza and Next because of medium-term structural pressure on earnings. Domino's sales will slip back as lockdowns are relaxed and investors are wrong to rank Next alongside online fashion operators because of its 500 stores, Shirley said.