Broker Round-up: easyJet, IAG, Babcock, Moneysupermarket.com, Thomas Cook, Genel

Oil prices lifted IAG and easyJet to the top of the FTSE 100, propelled higher by a bullish note from Jefferies, which now has ‘buy’ ratings on the biggest airlines listed in London


Falling oil prices mean cheaper fuel for airlines, which meant Iran’s nuclear deal with the world’s superpowers was cheered by investors in British Airways owner IAG (LON:IAG) and easyJet (LON:EZJ).

The pair flew to the top of the FTSE 100, propelled higher by a bullish note from broker Jefferies, which now has ‘buy’ ratings on the three biggest airlines listed in London.

easyJet was the biggest beneficiary as it was lifted to ‘buy’ from ‘hold’ with a target price of £16.20 for the shares. The broker is becoming increasingly confident that the low-cost carrier can drive its share price higher still, even after a near-90% rise in 2013.

Jefferies is more assured that it can hold on to its billing as Europe’s number one budget airline, having blown rival Ryanair (LON:RYA) out of the water.

“We are now increasingly confident in easyJet’s ability to sustain its strong competitive position, with self-help initiatives supporting further unit revenue and cost progress, as the business continues to evolve,” analyst Mark Irvine-Fortescue.

Ryanair’s shareholders may have suffered two profit warnings in quick succession, but these have not dented the broker’s confidence.

“A soft winter trading outlook has required a painful rebasing, but the fundamental attractions remain: low cost advantage, low fares, and sector-leading margins and ROIC [return on invested capital],” tipster Irvine-Fortescue added.

With profit growth off the table for now, he thinks it will return next year, underpinned the latest fleet order.

Jefferies’ target price on IAG, the group behind British Airways and Iberia, rises to 410p from 360p as it tips the stock’s stellar performance to continue. The shares are currently trading for 373p, but it believes more progress on the Iberia restructuring will send the share price higher still.

A wave of downgrades followed Babcock’s (LON:BAB) plans to team up with Avincis as analysts gave the deal the thumbs-down.

The FTSE 100 engineering services group is in talks to take a stake in the helicopter transport firm, but brokers failed to see the merits behind its plans to invest £1.5bn.

Numis Securities, Investec and Panmure Gordon all removed their ‘buy’ recommendations, predicting little upside for the share price from now on.

Investec said it would need more clarity about the deal to switch back to ‘buy’, while Panmure said the strong run from the share price meant a downgrade was inevitable “as concrete earnings upgrades are now required to further advance the shares from here in our view”.

City watchdog the FCA may have just launched an investigation into the price comparison industry, but Numis feels Moneysupermarket.com (LON:MONY) will emerge from the review unscathed.

The broker believes the review will find the industry to be “generally operating ok”.

“However, it is certainly an issue we need to keep a close eye on should any evidence of poor practice which has led to customer detriment emerge, which could lead to more material consequences,” it said.

The same broker upgraded tour operator Thomas Cook (LON:TCG) to ‘add’ from ‘buy’, helping the shares add 2.6% on Monday to 152p.

This is 23p behind the broker’s 175p target price, up from its previous goal of 150p.

The company’s cost-cutting drive seems to be bearing fruit, leading Numis to argue that “something is cooking”.

An upgrade from UBS helped Genel Energy (LON:GENL) shares up almost 3% as the Swiss broker topped up its target price by 85p to £11.20.

That leaves another £1 for the shares to gain if they are to reach that prediction.

Gold miners have worked hard to cut costs to offset a falling gold price, but Goldman Sachs expects the price to fall again in 2014 leaving them with limited options.

According to the US broker, cost cutting initiatives undertaken by the gold companies it covers have led to many mines with cash costs now below the spot gold price.

Goldman, though, expects the spot price in 2014 to fall to $1,144 per ounce, at which level more than 50% of these miners would burn cash.

There is little more they can do to reduce costs further given that most restructuring has been completed and further reduction in sustaining capex would reduce the face availability for mining in the future.

“Miners can deal with c.$1,300/oz but a sustained lower level would need another round of restructuring, in our view – most likely mine closures and more severe cost reduction.”

As a result, Goldman only has two buy recommendations and none among the London listed companies.

Randgold Resources (LON:RRS) shares lost 2.8% of their shine after Goldman cut its target price on the African gold producer by £10 to £45.

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