HSBC upgrades Halfords to 'buy' but cuts earnings estimates

HSBC upgraded Halfords from ‘hold’ to ‘buy’ on Tuesday but lowered its price target to 375p from 395p.

The bank sees progress in the retailer's focus on the development of service-led competitive advantages in core categories, with core retail sales up 24% in the first half with high margin services sales growing by 14%.

While sales were better than expected, gross margins were lower due to negative foreign exchange (FX in USD), cycling promotions and Tredz and Wheelies’ structurally lower margin.

Despite this, the bank feeling the group has defensive qualities to protect it from further negative impacts of FX in 2017-19.

New estimates suggested a 2-5% cut in the estimated 2017-2019 profit before tax but the stock now trades on a price earnings ratio of 10.4 for 2017 yielding 5.5%.

“The investment case is supported by strong, defensive cash generation and potential for further bolt-on M&A,” said analysts.

Halfords share price rose 4.3% to 330p at 1042 GMT on Tuesday.