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Pearson 'could do better', Barclays applauded and GSK gets a broker boost

Last updated: 14:48 27 Oct 2016 BST, First published: 10:08 27 Oct 2016 BST

education

‘Could do better’. This was title line of a research note on Pearson PLC (LON:PSON), the educational publisher, which is battling tough trading conditions.

Earlier this month, in its third-quarter update, it unveiled a worse than expected 7% decline in revenues.

The ‘chief culprit’, according to Morgan Stanley, was the company’s higher education business.

Reducing his EBITDA forecasts 1-8% for the years 2017-19, analyst Patrick Wellington took a closer look at his valuation model too.

His target price comes down by £1.50 to £9 a share, while the recommendation moves to ‘equal-weight’ from ‘overweight’ previously.

He does point out the stock, which trades at less than 11 times 2018 earnings per share, yields a very chunky 6.9%.

Of the 17 analysts polled by the Broker Forecasts website, seven have ‘buy’ recommendations on the stock, with the remainder either ‘sellers’ or ‘neutral’.

Just the tonic for GSK

Analysts were fairly impressed with GlaxoSmithKline plc's (LON:GSK) third quarter numbers, which showed, according to Deutsche, strong "execution", which to you and me, means delivering on its strategy.

The figures were boosted by the recent fall in sterling and strong sales of its flu vaccines, with group sales jumping 23% to £7.5bn while core operating profit rose 35% to £2.3bn.

Deutsche analyst Richard Parkes said the market beating sales were mainly down to the group's strong sales of vaccines, notably for flu - Bexsero, Boostrix and Synflorix.

Although Synflorix benefited from order timing and Boostrix from competitor supply constraints, the majority of this beat looks to be due to better execution, said Parkes, who rates shares a hold and targets 1,870p compared to a current price of 1,629p.

Overall, he added core EBIT (earnings before interest and tax) margins had improved improved year-on-year.

"We believe this likely reflects a decision to reinvest excess profits in promotional support and the pipeline."

UBS  repeats a 'neutral' on the shares and  a target of 1.650p, and notes that Glaxo had repeated its core EPS (earnings per share) growth guidance for 2016 of between 11 and 12 % but foreign exchange changes likely to increase that  to between plus 19% to  plus 21%.

Analyst Nicholas Hyett, at stockbroker Hargreaves Lansdown, said Glaxo had put in an "expectation busting performance", whbich had ben "further boosted by the fall in sterling, which, because of GSK's international earnings is expected to boost earnings per share by 21% at the full year".

Fence sitters and Deutsche Bank

The brokers were in ‘sit-on-the-fence mode’ in the wake of the Deutsche Bank’s (ETR:DBK) highly-anticipated quarterly figures.

The two issues were the robustness (or otherwise) of the balance sheet and the legal wrangle with the US Department of Justice (DoJ), which could result in a €13bn fine.

According Citi, updating its coverage after a conference call with management, the litigation issue may take months to resolve.

Questions also remain over how well capitalised the German bank is – it points out there was €3bn shortfall between its current core tier-one ratio and the target figure.

Citi rates the shares ‘neutral-high risk’ with a €13 price target.

According to Morgan Stanley, Thursday’s numbers were “all pointing in the right direction”.

In a note to clients it added: “Top down, revenues were stronger and the bank is delivering on costs with this quarter being a fourth consecutive one of declining opex.

“Provisions were higher again a function shipping and oil and gas exposure. We believe the stock price should react well given low expectations into the quarter.”

Like Citi, Morgan Stanley has rates the Deutsche ‘neutral, although its price target is slightly higher at €13.30.

Earlier the lender said it returned to the black in the third-quarter as it posted a €278mln profit – a vast improvement on the loss of €6bn at the same point last year.

The gripe for investors was the lack of clarity over its negotiations with the DoJ, which is investigating the company’s role mis-selling toxic mortgage-backed securities in the run up to the financial crisis.

Barclays...scribes out in force

City scribes rushed to comment on top FTSE 100 riser Barclays plc (LON:BARC), whose third quarter numbers appeared to vindicate CEO Jes Staley's decision to keep pushing its international trading business where others have pulled back, says one analyst.

Shares in the banking behemoth added over 3% to 187.35p as the group posted a better-than- expected £837mln in pre-tax profits for the third quarter.

The group's investment banking profits were up 40% compared with the same time last year, as its bond trading business surged, enjoying a recovery recently and sparked higher by the Brexit vote.

A solid third-quarter

Ken Odeluga, at City Index, says  a "solid" third-quarter performance is discernible within the typical mire of noisy exceptionals, qualifications and impairments.

"The results represent further vindication of CEO Jes Staley’s reluctance to withdraw from the more volatile international investment banking and trading businesses, to a similar extent to large UK rivals."

He praised Barclays' foresight in "remaining" in a prime position to capitalise on the economic and financial instability of the summer, but conceded that the bank was not immune to potential uncertainties that all British banks face in the year ahead.

Elsewhere, Russ Mould, at AJ Bell noted the revival in bond trading helped to offset the provision of a further £600mln to cover payment protection insurance mis-selling claims.

In terms of PPI, Odeluka reckons Barclays is more at risk of having to set aside more to cover costs on this matter than peer Lloyds Banking Group (LON:LLOY).

Debs not out of the woods yet

Retailer Debenhams isn’t out of the woods yet, according the City’s commentators. Liberum, which rates shares a 'hold' said the earnings marked the first since the arrival of new chief executive Sergio Bucher on October 17.

"Unsurprisingly he will not update the market on his longer term plans until the interims next year."
Debenham's price to earnings for 2017 at eight times is at the lower end of the peer group but Liberum forecasts declining earnings as shopping habits change and foreign exchange headwinds begin to bite.

George Salmon of Hargreaves Lansdown, said: "Debenhams has hit profit expectations, but life in the UK’s clothing market has been difficult. With further pressure coming from the impact of the weaker pound, it is probably only going to get tougher for retailers in the coming months.

"The group has currency hedges in place for the coming year, so won’t feel the pinch from weaker sterling just yet, but it is just a matter of time."

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