Jefferies upgrades M&S, Next and Sainsbury’s to 'buy'

Jefferies upgraded its stance on a host of UK retail stocks on Monday.

Marks & Spencer, Next and Sainsbury’s were all upgraded to ‘buy’ from ‘hold’, while B&M European Value Retail was lifted to ‘hold’ from ‘underperform’.

On M&S, for which it has a 310p price target, Jefferies said it thinks the company is now a far stronger business than was historically the case.

"This newfound strength is built on an expansion of the food offer which is clearly resonating strongly," it said.

It said growing market share and margins in both core businesses should help underpin both earnings expansion and, more critically, multiple expansion, as the market recognises the less volatile path of earnings and free cash flow delivery the stock now offers.

As far as Next is concerned, Jefferies said shareholders have benefited in recent years from the group’s "remarkable" ability to squeeze out resilient profit performance in its highly mature domestic position.

"Our more constructive view of the UK consumer cycle results in us now estimating a NXT profit before tax delivery for the coming year some 2% higher than the group’s guidance and 1% ahead of consensus," it said.

"What is more material, however, is the possibility of investors more fully embedding the expanding tam of the group. And with it allowing for a new valuation debate that transcends the historical boundaries of a quintessentially British UK brand."

Jefferies hiked its price target on Next to 10,300p from 6,800p.

On Sainsbury’s, the bank said fears around an excess capex burden limiting free cash flow upside have provoked intense investor concern since the capital markets day in February.

"We believe this overstates the risks and overlooks the positives emerging from the most supportive competitive backdrop in UK grocery in decades," it said.

"SBRY in particular have outlined a multi-pronged approach to capitalising on this situation. As we noted after the CMD, the plan is to enable margin expansion through volume growth and opex control.

"All of which offer substantial upside to FCF, which we see at a cumulative £1.8bn over the next three years versus guidance for 'at least £1.6bn'."

Jefferies has a 300p price target on the shares.

Finally, the bank said its ‘underperform’ on B&M had been predicated on concerns that the improvement in UK EBITDA margin delivered in FY21 and FY22 may not be sustained.

"We are increasingly of the view that it can be an enduring feature and, underpinned by an impressive fundamental model, an improving UK consumer outlook, and an undemanding valuation multiple (13x PE), we raise our recommendation to hold."

Jefferies has a 525p price target on B&M.