Right now, BT (LSE: BT-A) (NYSE: BT.US), Dixons Carphone (LSE: DC) and Associated British Foods (LSE: ABF) are winning plaudits from professional analysts.
Ringing the changes
As customers warm to “quad-play” packages of landline, mobile, broadband and Pay-TV, the traditional FTSE industry segments of fixed line telecommunications, mobile telecommunications and broadcasting & entertainment are looking increasingly outdated.
Views vary on the relative prospects of the big FTSE 100 players in these segments — BT, Vodafone and Sky — in a fast-changing environment, but BT has the edge, if City sentiment is to be believed. According to data provider Digital Look, 59% of brokers rate BT a Buy, compared with 54% for Vodafone and just 19% for Sky. Also, there are fewer out-and-out bears on BT.
The BT bulls see the company reaping the rewards of its aggressive move into TV and mobile. Analysts at Berenberg, for example, reckon BT will be generating normalised free cash flow of £3.8bn within three years — up 35% from a current £2.8bn. Berenberg reckon BT’s free cash flow yield of 8.4% (based on a market capitalisation of £45bn after the acquisition of EE) is one of the most attractive in the sector.
Rampant retailer
Last year’s merger of Carphone Warehouse and Dixons Retail (Currys/PC World) was warmly greeted by the market. Even though the shares of Dixons Carphone have risen strongly since the merger, City analysts remain resoundingly positive on the stock.
The company said in a Q4 trading update last week that it now expects profits for the full year to be above the top end of its previous guidance range. Despite a price-to-earnings (P/E) ratio in the high teens, Citigroup and Barclays both reiterated their positive stance on the stock, raising their price targets to 535p and 540p, respectively.
Meanwhile, analysts at Numis, who have an Add recommendation and 530p target, commented: “Although we think a P/E premium would be hard to sustain over the medium-term due to the industry margin structure, we still see upside to forecasts and remain positive”.
The Primark powerhouse
Associated British Foods (ABF) owns several different food businesses, which own a number of strong brands. However, the jewel in ABF’s crown is the hugely successful discount fashion chain Primark. The prospects for Primark have recently led a couple of heavyweight brokers to join what was already a bullish camp on the company.
Goldman Sachs opted for no half-measures in switching its recommendation from Sell to Buy in one fell swoop. The broker reckons that while ABF trades on a premium forward P/E of 28, the shares have de-rated by 20% relative to the consumer staples sector since December. GS’s analysts believe Primark’s launch in the US market this September is set to be a success, and the broker has lifted its price target from 2,755p to 3,120p.
HSBC, which initiated coverage of ABF last week, is even more bullish with a Buy recommendation and 3,680p price target. HSBC also cites Primark’s launch in the US as a major factor in its thesis. With continuing success in European expansion and an even faster roll-out in the US, HSBC’s analysts expect ABF’s earnings to rise by 97% in the next five years.
