BoA Merrill Lynch ups Rotork and Vesuvius, downgrades Smiths

The bank upped Rotork to 'buy' from 'underperform' and lifted the price target to 300p from 240p given that the stock has given up all the gains made following the appointment of the new CEO and he has not yet had a chance to deliver any of the potential margin expansion promised by optimising the cost structure.

"Rotork’s high exposure to late cycle oil & gas markets (i.e. mid- and downstream) as well as the ongoing margin improvement story is likely to support the stock over the next 12mths," it said.

"While central bank policy is likely to keep multiple re-rating under pressure, there is good scope for earnings momentum as cost initiatives gain traction," it added.

Merrill upgraded Vesuvius to 'buy' from 'neutral', keeping the price target at 620p.

It pointed out that Vesuvius was hit hard in the October selloff and has since de-rated around 15-20% from 2018 peaks.

With the shares now trading at a discount of around 20% to the sector, BofA ML thinks the current price discounts Vesuvius’ strong balance sheet, low global steel production expectations, near-term cyclical concerns and management continuing its proactive approach to self-help with a further £33m in further cash savings to be delivered in the next three years.

Merrill downgraded Smiths to 'underperform' from 'neutral' and slashed the price target to 1,350p from 1,550p. It said that from an operational standpoint, FY19 is likely to be particularly weighted to the second half, with the detection and medical businesses both likely to be weak in the first half before seeing acceleration through the second half.

"Overall, we remain of the view that consensus expectations are about right for the next 12-18 months but despite the progress in both Detection and Medical the aggregate earnings momentum remains lacklustre relative to the broader sector.

"In the context of an uncertain macro environment, Smiths’ defensive portfolio does offer some appealing characteristics, but management need to deliver before we believe investors will return to the thesis."

At 1550 GMT, Rotork shares were up 4.5% to 261.22, Vesuvius was 3.8% higher at 542p and Smiths was 1.1% higher at 1,400p.