Broker tips: Wolseley, M&S, Moneysupermarket

“While we continue to see attractions (market share gains, margin expansion and more capital returns) on a medium term view, we are downgrading our rating to hold (from buy) and cutting our price target to £42 on the back of the recent loss of momentum in like-for-like sales growth, in the context of a relatively full valuation,”Canaccord analysts Aynsley Lammin and Matthew Walker said in a note to investors.

The building material supplier reported on Wednesday a 0.4% drop in like-for-like UK sales for the three months to April, due to weakness in the repairs, maintenance and improvement markets. Like-for-like sales in Central Europe fell 0.2%.

Wolseley’s US business reported like-for-like revenue growth of 5%, but has also suffered from weak demand in the industrial market.

“While we expect LFL growth to improve for Q4 as a whole from the +1% of late, the momentum we expected to see in US trading is clearly not coming through as strongly as expected,” UBS said.

“Price deflation continues to be an issue, particularly in the US, with no imminent change in these pricing trends expected.”

The third quarter results come amid a restructuring of the group, which is now estimated will cost about £20m, up from the £15m it originally forecast. In March the company announced it was closing 15 branches in the UK as part of the restructuring.

The group said it was on track to deliver results in line with consensus expectations for the full year to July 2016. But UBS noted that Wolseley also seemed to signal that while it expected some improvement, it thought it was unlikely that like-for-like growth in the US would reach levels close to the guidance range of 5-6% growth over the coming months.

“Given the lack of visibility over the outlook for like-for-like growth, we would prefer to back off for now and look for a more attractive entry point.”

Marks & Spencer had its ‘buy’ rating reiterated and target price cut to 440p from 490p by UBS on Thursday.

UBS hailed chief executive Steve Rowe’s strategy to revive the retailer’s clothing business by reducing prices and improving the quality.

The newly appointed boss of M&S warned that profits in fiscal year 2017 would be dented as a result of the price cuts. Rowe said the company had lost £200m in clothing sales in the last three years and drastic measures were needed to turnaround the general merchandise division.

“The scale of the price cuts (15% reduction across 30% of the range) is significant enough for customers to notice and combined with less product overlap and brand simplification we expect to see the like-for-like sales improve once the price cuts annualise,” said UBS analyst Adam Cochrane.

UBS cut its estimate on pre-tax profit for fiscal year 2017 by 12% to £625m. Like-for-like sales are now expected to drop 3%, compared to an earlier estimate for a 1% decrease, due to lower margins and higher operating expenditure.

“Our price target remains set under discounted cash flow and falls to reflect lower profit estimates,” said Cochrane.

“We re-iterate our buy rating on M&S as we think the current share price more than reflects the downgraded guidance. We see greater upside risk at this stage given conservative guidance, potential sentiment improvement and healthy dividend yield.”

Moneysupermarket.com was under the cosh on Thursday as Jefferies downgraded the stock to ‘hold’ from ‘buy’ and cut the price target to 312p from 440p.

The bank said it was updating its estimates after reviewing the latest data set from Hitwise, an online monitoring service which provides rankings of the world’s most popular websites.

Jefferies said Hitwise was arguably the UK’s most authoritative source of online data analytics for desktop and mobile traffic.

The bank said it was moving to hold “given Hitwise analysis showing a weak start to 2016, muted financial expectations, and the equity performance over the past 18 months”.

“Over the last three years, there have been some meaningful moves in market share and MoneySupermarket.com is no longer the market leader, according to Hitwise at any rate,” it said.

Jefferies cut its group revenue forecasts by around 6.5% for FY 2016/17/18, driven by low double-digit reductions in Insurance and Travel.

It also cut its adjusted earnings before interest, tax, depreciation and amortisation estimates by around 13% over the tree years.

Meanwhile, adjusted earnings per share estimates for FY16 and FY17 were reduced by around 12%.