Deutsche Bank upgrades Tesco and WM Morrison ahead of Christmas results

Deutsche Bank has upgraded Tesco and WM Morrison ahead of the supermarkets releasing Christmas trading figures later this month.

In a note from the investment bank on Tuesday, Tesco was upgraded from ‘hold’ to ‘buy’ but had its target price cut from 210p to 200p, while Morrison’s rating was raised from ‘sell’ to ‘hold’ but its target price kept at 155p.

Its rating for Sainsbury was constant at ‘hold’.

Deutsche Bank’s earnings per share estimates for Tesco were lowered by 10%, while estimates for Sainsbury and WM Morrison were unchanged.

“However, sector share prices have declined more than 10% in the past 2 months, underperforming a broadly flat market,” it said.

The note highlighted Kantar’s data for November, which suggested a grocery market sales decline of -0.4% and no easing of deflation.

However it said while Tesco has a disappointing topline performance, it has the strongest valuation support.

“We lower our Tesco UK Q3 and Q4 LFL forecasts from +0.1% to -2.5% and from -2.3% to -3.4% respectively.

“The strong valuation support we refer to relies on meaningful UK EBIT margin progression, from +0.5% in H1 15/16 to a normalized 2.2% by 18/19.”

For Sainsbury and WM Morrison, Deutsche Bank said it is not good but within the range of expectations.

“We forecast a -0.8% LFL for Sainsbury’s in FY Q3 (cal Q4). We forecast a -1.5% LFL for Morrisons for the nine weeks to Christmas, within a -2.0% FY Q4 LFL,” it said.

WM Morrison will report Christmas trading figures on January 12, while Sainsbury will post figures on January 13 and Tesco on January 14.