HSBC has upgraded car parts and bikes seller Halfords Group PLC (LON:HFD) to 'buy', even as it cut the target price from 395p to 375p.
Last week's interim results were in line with market expectations, though sales were better than expected; offsetting this was a decline in gross margins due to unhelpful foreign exchange movements, cycling promotions and the inclusion of recent acquisitions Tredz and Wheelies, which have lower margins than the core Halfords business.
"While we adjust for the further negative impact of FX for FY17-19e, it would wrong to be overly negative on a group that offers defensive qualities relative to the wider sector," suggested HSBC.
HSBC noted that around 70% of group sales are related to car parts, an intrinsically defensive sector.
The shares trade on a price/earnings ratio that is 15% below the sector, while given the retailer's strong cash generation, the 5% dividend yield looks appealing.
The investment case is supported by strong, defensive cash generation and potential for further bolt-on acquisitions, HSBC argues.