There is the capacity to incur significant losses investing in the UK’s three grocery stocks, according to the London arm of a Wall Street bank.
The highly rated retail team at Goldman Sachs has ‘sell’ recommendations on Tesco PLC (LON:TSCO), Wm Morrison Supermarkets PLC (LON:MRW) and Sainsbury PLC (LON:SBRY).
The potential ‘downside’ of buying stock in the respective companies is 31%, 21% and 20%, based on the price targets generated by the house’s number crunchers.
In a note to clients, the bank said that while valuations are inflating, input cost pressures are also “escalating”.
“With Tesco and Morrisons valuations now implying material margin recovery, we believe this margin risk is not appropriately reflected in stock prices,” Goldman told clients.
It is interesting that American giant’s take on the three listed UK grocery stocks appears to chime with the general scepticism across the Square Mile.
According to the Broker Forecasts site, only two of the 12 analysts polled is a buyer of Sainsbury, the figure is three out 15 for Tesco and one in 11 for Morrisons.
The UBS take on Lloyds figures
Swiss broker UBS was first to the party with its take on Lloyds (LON:LLOY) third-quarter figures, which failed to set the City alight.
UBS's take on its UK peer was that earnings came in slightly ahead of forecast, while the balance sheet proved resilient.
The shares marked time at 55p after Lloyds revealed it would set aside a further £1bn to cover liabilities related to the payment protection mis-selling scandal.
UBS reckons the stock is worth 65p compared to a current price of around 55p.
The PPI provision reduced reported profit before tax to £811mln in the third quarter from £958mln in the same period of last year. Underlying profit, which excludes the PPI provision and other one-off items, eased to £1.91bn from £1.97bn the year before.
Meanwhile, Henry Croft, a research analyst at spread betting outfit Accendo Markets, said the profits missed market expectations, while the latest PPI provision gives the bank the unwanted accolade of lender with the largest amount of dosh set aside to cover the PPI fall-out.
Laith Khalaf, senior analyst at Hargreaves Lansdown, was in forgiving mood.
“Things haven’t got any worse for Lloyds over the summer, which under the circumstances is a positive result," he said.
Whitbread chopped
Elsewhere, Credit Suisse was one of several brokers to dip into Whitbread plc (LON:WTB) on Wednesday following interim results yesterday and has chopped down the price target to 4,030p from 4,360p.
It says the firm is taking the right actions in a tough market, namely chasing down efficiencies, investing where needed, and focusing on scale opportunities internationally.
Credit rates shares 'neutral' due to a lengthy list of what it calls "uncertainties", including Airbnb, five years of 6-7% National Living Wage increases, the UK macro landscape post Brexit and Costa's cost investment/margin falls.
Yesterday's half year results from the Costa Coffee and premier Inn owner did beat market expectations slightly and the group as a whole posted LFL (like-for-like) sales of 2% - up from 1.8% in the first quarter.
But this is increasingly being driven by room extensions rather than RevPAR (revenues per available room) or like-for-like sales at Costa - hence is likely to be a drag on returns.
Societe Generale today cut the price target on the shares to 4,100p from 4,220.30 and rates the stock a 'hold', while Barclays Capital repeated an 'underweight' stance and a 3340p price target.
Ithaca overvalued
Meanwhile, Barclays’ analyst James Hosie says Ithaca Energy Inc (LON:IAE) is about to mark a transformational event with the start-up of the Stella field in the North Sea, nevertheless he’s bearish on the AIM share.
Hosie in a note said that Ithaca shares currently trade at a 30% premium to Barclays’ valuation, which is 69p per share.
“We believe the market is already pricing in more than can be reasonably expected in the near (and possibly even medium) term,” the analyst said.
Hosie rates Ithaca as ‘underweight’ and has a 70p per share target.
Brokers upbeat on Mariana and serious about Sirius
The brokers remain upbeat on Mariana Resources (LON:MARL) after the release of the latest bumper batch of drill results.
"The current drilling, particularly in the new Ridge and Southern Vein Field areas looks likely to add additional resources when they are incorporated into the resource estimation modelling," said natural resources boutique SP Angel.
The next big landmark for Mariana will be the preliminary economic assessment of Hot Maden, according to Northland Capital, which values Mariana a 104p a share (current price 67p).
Scheduled for the end of next month, the document "will provide investors the first guide to the economics of this exceptional project".
The number crunchers at broker Liberum have taken a closer look at Sirius Minerals PLC’s (LON:SXX) North Yorkshire fertiliser project and have upgraded the valuation of the planned mine by 50%.
The re-evaluation follows a royalty and share deal struck with an offshoot of Australia’s Hancock Prospecting.
Liberum estimates Hancock could end up paying as much as 170p a share in the equity portion of the funding.
This has knock-on implications as to the value of the giant polyhalite deposit, which it now reckons is worth US$6bn, up from US$4bn previously.
“We can also derive an implied valuation for the project based on the royalty agreement, although it of course relies on our own assumptions on volumes, price, and discount rate,” said analyst Richard Knights.
The Liberum stock picker reckons the shares are worth 50p each. At 8.40am they were trading at 36.35p each, up 2.4%.
On Tuesday Sirius said it said it had tied up a financing deal worth up to US$300mln.
The pact with a sUBSidiary Gina Rinehart’s Hancock Prospecting will form an important plank of the overall funding package for the AIM-listed group’s North Yorkshire Polyhalite Project.
Under the terms of the agreement, Hancock British Holdings is acquiring a 5% royalty on the first 13mln tonnes of fertiliser produced every year and 1% on anything over that output figure at a cost of US$250mln.
Hancock has also agreed to acquire US$50mln-worth of Sirius shares.
Chief executive Chris Fraser told investors: "We are delighted to have signed this agreement with such an experienced party in the mining industry, as well as one that has very successful and strong leadership and a long term and growing agricultural interest."