Two stocks which analysts say you should now buy
Investors should always sit up and take notice when an analyst changes stance on a stock, particularly if they are upgrading to buy or downgrading to sell. It sends a strong message that something has changed with the investment case.
Sometimes they change rating on a stock for valuation grounds. For example, a stock may have fallen in price to such an extent that they think it is now worth buying. Or a stock may have rallied too far and they think it is time to take profit.
Of particular interest to us is when their detailed research unearths something which warrants taking a new look at a business. This might be in response to a trading update or a set of financial results that shows a company has fixed problems, unearthed new avenues for making money or found something which tarnishes the investment case, for example.
WHERE TO GET THE INFORMATION
Retail investors are at a disadvantage to institutional investors because they can rarely access analyst research notes. Most of them aren’t available to the general public due to strict rules in the financial sector.
However, Shares can help in this regard on two fronts. We get privileged access to many of these notes and will endeavour to communicate the most important bits of information in the digital magazine and in the news section of our website where possible.
Alternatively, Shares subscribers can visit our website and discover when analysts switch ratings on stocks – follow this link.
We will now give you two exmples of stocks where analysts have recently changed their view and why they’ve turned positive.
MITCHELLS & BUTLERS
Owen Shirley, analyst at investment bank Berenberg, last week called shares in pubs operator Mitchells & Butlers (MAB) ‘cheap as chips’ and upgraded his rating from ‘hold’ to ‘buy’.
He admits the business still has challenges but says trading momentum is ‘improving materially’.
Mitchells & Butlers has lagged its quoted peer group for many years as it was heavily indebted and had a large pension deficit acting as a material drag on free cash flow. It was also struggling to grow sales, had to suspend the dividend, and has had five different chief executives in the past 10 years.
Phil Urban has been CEO since September 2015 and has spent a considerable time fixing the business. He has sold off sites, reduced the number of Harvester sites, tripled the number of Miller & Carter premium steakhouse brand outlets to more than 100, and grown the Stonehouse Pizza & Carvery brand to an estate of over 100 sites.
The next step was having a tighter focus on resolving customer complaints, improving the online booking and stock control systems,
better training for managers and improving the menu.
Trading is now getting better including 4.1% like-for-like sales growth in the first half of its current financial year.
WHAT DOES THE EXPERT SAY?
‘In 2014, M&B’s net debt/EBITDA stood at 4.5-times, with a £380m pension deficit (c1.2x EBITDA) on top,’ says Shirley.
‘Today, bank net debt is down to 3.8-times, and the pension deficit has been reduced to c£150m. Within three years, net debt/EBITDA will be below 3-times and the pension deficit will be gone. That will make Mitchells & Butlers vastly more investable, and should enable a step-change in returns to shareholders.’
It is easy to dismiss Mitchells & Butlers as a perennial disappointment yet Shirley makes some valid points. We agree there is now enough evidence to turn positive on the company.
At 288.5p, it trades on 7.4 times forecast earnings for the year to September 2020. It’s just a shame that it doesn’t have the same high yield attraction as many of its peers.
Between 2015 and 2017 Moneysupermarket (MONY) saw a decline in the number of unique price comparison website visitors as the business was focused on rebuilding its back-end systems.
Its share of price comparison web traffic began to stabilise in 2018, coinciding with a warning from the company not to expect any earnings growth in the year ahead as it would be spending money on product engineering.
This year investors have warmed to the stock again because the outlook is better. In late May, UBS analyst Hubert Jeaneau upgraded his rating to ‘buy’ on Moneysupermarket, saying the shares are attractive despite having already rallied 35% year-to-date.
WHAT DOES THE EXPERT SAY?
He gives two key reasons why the stock is attractive: ‘1) Its engineering hub is now operating in full-swing, likely boosting conversion rates and revenue growth, and 2) It has a unique opportunity to drive recurring transactions on its 13m user base, at high incremental margins.’
Jeaneau has pinpointed numerous factors which imply Moneysupermarket is fighting back. For example, he says the threat from credit scoring apps on its position in the credit card/loans segment is receding.
He also implies a drop in premiums in the general insurance sector over the past year or so may have passed its trough and premiums could now be rising, to the benefit of the company.
Going forward the reinvention of Moneysupermarket is going to be a long process and investors shouldn’t expect large rewards in a short period of time.
Strategic plans include digitising mortgages but that is not going to happen overnight. Its plans to offer more personalised services and encourage more frequent interactions could also be a slow burner. The analyst warns that it will take time to get results given low customer engagement in price comparison activity.
At 379.3p, the shares are trading on 18.3 times forecast earnings for 2020. That looks high enough for a company that still has considerable execution risks with its new strategy. The business is interesting but we wouldn’t rush to buy at that price.