ASOS and Burberry get reality checks; Reckitt fails to cut the mustard

Life's tough for glamour stocks that stop dazzling. Meanwhile, Reckitt fails to cut the mustard and Travis Perkins lowers guidance

Burberry models
Burberry is under-performing its peers

Yesterday’s trading update from former stock market darling Burberry Group PLC (LON:BRBY) was a reality check, according to Jefferies.

Like-for-like sales growth of 2% year-on-year was an improvement on the previous quarter’s performance, but not a big enough one in the broker’s view, considering it was up against soft comparative figures.

Thanks to management’s tight cost control, full-year profit before tax expectations remain unchanged, but the fashion firm’s increasing under-performance against its major peers is likely to hold back the share’s near-term performance, Jefferies believes.

The broker rates Burberry as no more than a ‘hold’, with a price target of 1,290p – some way below the current level of 1,437p.

JP Morgan Cazenove is also sitting on the fence when it comes to Burberry, after the sales improvement came in a tad below its expectations of growth of three to four per cent.

The boost was sterling’s post-Brexit vote collapse should lift full-year profit before tax (PBT) by around 5%, but to a certain extent this was already reflected in the share price, Cazenove believes.

“Ultimately, what these numbers suggest to us is that the forex bonanza is boosting reported PBT on translation but not the underlying trend (via travelling flows) as much as hoped,” Cazenove said, as it reiterated its 1,450p price target.

Like Burberry, online fashion flogger ASOS PLC (LON:ASC) got a pasting after its trading update yesterday, even though, in Cazenove’s view, the results represented a better-than-expected end to what was a very strong financial year for Aim’s flagship stock.

Fourth period sales growth was up year-on-year in every region on a constant currency basis and profit before tax was 2% ahead of consensus.

ASOS’s management said the “pace at ASOS is continuing in the new financial year”, which Cazenove interpreted as current trading being at similar levels to those seen at the end of the previous financial year.

For a glamour stock such as ASOS, maintaining fast growth is apparently not enough, which might explain yesterday’s share price shellacking.

Cazenove has left its current year profit before tax forecasts broadly unchanged, and stuck with its ‘overweight’ recommendation and 5,400p price target.

Updates on Wednesday from the big guns, Reckitt Benckiser and Travis Perkins, met with a muted response.

Reckitt Benckiser Group PLC (LON:RB.) may be held in higher regard than its fellow Anglo-Dutch consumer goods group Unilever after the latter’s fall-out with Tesco, but an underlying year-on-year 2% increase in sales in the third quarter was not enough to cut the mustard for a market that had been expecting growth of 2.8% in like-for-like (LFL) sales.

Ahead of the company’s conference call with analysts, Liberum was sticking with its ‘buy’ recommendation.

“In our view, Reckitt's strategic focus on faster-growing, higher-margin Health and Hygiene categories underpins top quartile organic sales growth – we estimate 5%, ‘moderate to nice’ EBIT [underlying earnings] margin uplift driven by category mix and cost savings and sustainable double digit clean EPS [earnings per share] growth (in constant FX),” Liberum said.

“Strong cash flow provides scope for healthy shareholder returns and firepower for M&A [mergers & acquisitions] targeted at accelerating Reckitt’s push to consolidate Consumer Health. We estimate Reckitt will generate £5bn in FCF [free cash flow] post dividends over the next five years. Selected disposals (e.g. Food) could add further capacity,” it added.

Reckitt’s management lowered full-year LFL sales growth guidance to 4% from previous guidance of 4 – 5%.

“The factors behind the subdued performance are as previously guided, so the South Korean litigation/de-stocking, a weak Russian performance and Hygiene growth hit the failure of a Scholl/Amope NPD initiative to land,” noted Darren Shirley, at Shore Capital Markets.

Based on Shore’s earnings estimates, the shares are trading on an earnings multiple of 24.9, and with “trading weak and a lack of visibility on just how weak” Shore reckons the stock is no more than a hold.

As for builders’ merchant Travis Perkins PLC (LON:TPK), its shares tumbled 6.9% after its trading update, but Liberum is keeping the faith, given that the price/earnings ratio (PER) is “undemanding at around 12.5”.

Third quarter LFL year-on-year sales growth of 2% was down from 2.3% in the preceding quarter and below Liberum’s forecast of 2.3.

Management said underlying earnings (EBITA) for the full year will be “slightly below” the market consensus of £415mln and, for that matter, Liberum’s estimate of £422mln.

“Travis’s shares have been weak coming into these results, with news not expected to be good, and even if consensus falls by around 2-3%, the shares would still trade at around 12.5x 2017 PER, and this would be before any benefits of the restructuring announced today,” Liberum argues.

“It is not easy to understand whether softness is due to uncertainty around the EU referendum and its after-effects or a sign of more fundamental weakness. Our own view is that fundamentals still appear reasonable for these markets, with improving re-mortgaging activity and significant pent-up demand, but time will tell whether these fundamentals can drive growth in uncertain times,” it added.

Cenkos Securities is baffled by the sluggish share price performance of radiation technology specialist Kromek Group PLC (LON:KMK), which this morning announced the roll-out of its D35 devices to the Defense Advanced Research Projects Agency (DARPA) had reached a milestone of 10,000 units.

“10,000 D3S units have been supplied to DARPA to date with approximately two-thirds of this order falling into 2016/17E. We expect the balance will be delivered in H2E. Successful trials have occurred through 2016 in a networked real world environment for the Port Authority in New York and the Sigma programme will now conduct a large scale test in Washington DC this year,” the broker said.

What with the company announcing a batch of contract wins earlier this week that underpinned full-year revenues expectations, “the momentum in the business is derisking the investment and this is at odds with a weaker share price”, in Cenkos’s view.

“We see scope for positive surprise,” it concluded.

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