Broker tips: M&S, European airlines, Sports Direct

The bank said it expects another quarter of negative like-for-like performance from M&S in General Merchandise and it’s also concerned that LFL growth in the food business is becoming harder to achieve.

“Whilst we continue to like the self-help story and see the potential for ongoing gross margin gains, we do think that M&S has less opportunity to reduce opex growth guidance than in previous years.”

This, combined with ongoing pressure on International profits led JPM to downgrade its full-year pre-tax profit estimate for 2016 to £666m from £706m.

It said this leaves the bank 6% below Bloomberg consensus and implies only 1% pre-tax profit growth in 2016, versus its forecast for 6% growth at Next.

JPM added that the new target price offers only 6% upside to the current share price.

European airline stocks fell sharply on Wednesday, dragged lower by rising oil prices and a downgrade by Credit Suisse.

“We can see the close correlation between airlines and the oil price, with much of their recent outperformance resulting from the renewed weakness in the oil price,” said Credit Suisse, as it cut its stance on European airlines to ‘benchmark’ from ‘overweight’.

Beyond lower fuel costs, CS said the fall in the oil price has also benefitted airlines through the boost it has given to consumer incomes. It said this was particularly true for budget airlines, which are predominantly consumer plays, as opposed to the flag-carriers where up to half of revenue is corporate-related.

Still, the bank said that if oil prices were to stabilise or stage a modest recovery, one of the most significant tailwinds airlines have recently enjoyed would fade away. In addition, it argued that there are some signs that capital discipline is deteriorating: capex to sales has increased and historically a low oil price has been associated with an increase in competition, it said.

It said that while valuations are still attractive on 12-month forward P/E relatives and earnings momentum is positive, the latter is at levels where it has historically rolled over, with earnings revisions boosted by the falling oil price.

“On top of that, the sector is overbought,” it added.

Oil prices surged on Tuesday after the Organisation of Petroleum Exporting Countries forecast big cuts to oil investments that are expected to slow production and reduce global crude supplies. In addition, the Energy Information Administration estimated that crude production in September was down 120,000 barrels a day from August and said output is likely to continue to decline through next August.

RBC Capital Markets downgraded Sports Direct to ‘sector perform’ from ‘outperform’ and cut its price target to 850p from 900p.

The Canadian bank said Sports Direct's already-dominant position in UK sportswear retailing means that its long-term growth increasingly will have to come from other areas such as International, online growth and mainstream fashion.

It said that two years ago it looked as if Sports Direct would become the international consolidator of the sector following its acquisitions in Austria and the Baltics. However, it now expects growth to be more moderate as its own brands are less well known and it will take time to improve the merchandising and the product offer of international stores.

In addition, it noted that Sports Direct sources the majority of its product from Asia in US dollars and as such, will face a dollar sourcing headwind on own-label product from full-year 2017, which the bank expects to constrain gross margin and possibly volume growth.

“Sports Direct trades on 16x calendar 2016 price-to-earnings, which we think is reasonable for low double-digit growth, however, we think other growth stocks in the sector such as B&M and Zalando offer more valuation upside with a stronger international expansion story.”