Broker tips: WOSG, CMC, JD Sports, Spirax-Sarco, beverage stocks

(Sharecast News) - The significant exposure that Watches of Switzerland Group (WOSG) has to Rolex is both the group's main investment appeal and a key risk, according to broker Stifel which kicked off coverage of the stock with a 'hold' rating on Friday. WOSG is a leading retailer with long-standing partnerships with all the major Swiss luxury watch brands in the UK and US. It has "untapped penetration potential" in the US and Continental Europe via M&A and selective boutique openings, Stifel said.

Currently, Rolex accounts for around half of WOSG's group revenues, and the recent acquisition of Bucherer by Rolex "creates some clouds over the long-term horizon and somewhat changed the equity story", the broker said.

"Bucherer under Rolex ownership may increase competition for M&A in the US and make it harder for WOSG to penetrate new markets in Continental Europe with Rolex potentially embracing DTC (direct to consumer) in the future, following the steps of all other leading Swiss luxury watch brands," Stifel said.

The stock trades at just 11 times forward earnings, which looks "cheap" considering its revenue and profit growth potential. "However, a challenging US/UK macro backdrop and the emergence of long-term clouds post the Rolex-Bucherer deal may keep a lid on multiples," the broker said.

Stifel gave a 680p target price for the stock.

RBC Capital Markets cut its price target on CMC Markets to 140p from 250p as it reduced estimates following the FY24 profit warning.

CMC warned last month that annual net operating income would be lower than last year as revenues continued to fall in a "challenging" environment.

It said subdued market conditions had continued through August, with trading and investing net revenues trending 20% lower year-on-year.

RBC said it was cutting its net operating income by 18% on average across its forecast period following the recent unscheduled trading update.

"The drop-off in volatility seen year-to-date has been untimely for CMC as it has coincided with a period of elevated cost owing to investment in strategic initiatives," it said. "The operating de-leverage effect means earnings per share estimates fall by 70% on average.

"We look to 1H results in November for an update on medium-term targets, but in the interim we see valuation support from the high proportion of market cap now covered by surplus own-funds, and retain our outperform, speculative risk rating."

Berenberg lifted its price target on JD Sports Fashion to 225p from 210p and named the retailer its "top pick" in the sector, as it said the recent slump in the share price has created an attractive entry point.

Berenberg noted that since the initial excitement about the company at the time of its capital markets day in February, the shares have fallen by nearly 30% due to macro uncertainties, peer warnings and perceived execution risks.

"This looks harsh to us, as consensus earnings have continued to rise, and we think risks are lower than the market fears," it said. "We also think investors still underappreciate the strength of JD's model, its positioning and the international opportunity."

The bank said JD offers "extreme value" for the quality and growth on offer, looking cheap against every peer group.

Berenberg said the stock is priced for significant downgrades, which it does not reckon will materialise, creating an attractive entry point.

"JD is a brand with a huge, proven global growth opportunity: JD is more than a retailer - it is a global brand dominating 'mindshare' of the generation-Z consumer, with impressive local and global social media engagement (eg circa 66m TikTok likes versus an average c28m for sports brands and c5m for sports retail peers)," it said.

"There is strong international demand for JD, the foundations for growth have been set, and store targets look very achievable, 'derisked' by local management expertise, leading e-commerce and attractive store economics."

The bank said the core JD fascia is the "jewel in the crown", already internationally proven, with sector-leading profitability and increasing strategic importance to brand partners, which are supporting JD's accelerated growth ambitions.

Berenberg also argued that reaction to recent acquisitions - adding over 8% to earnings - has been muted, but that these complementary acquisitions bring lots of strategic value, and JD has an excellent track record of creating value from deals.

In addition, near-term concerns are well overdone, it said, noting that JD is still trading down by 13% from the Dick's Sporting Goods/Foot Locker warnings, when readacross is limited, and more recent US sports updates have been positive.

"Inventories and the promotional environment will also improve into H2. We expect JD to reiterate guidance at H1 results - sufficient to alleviate investor concerns and drive a relief rally."

Berenberg rates the shares at 'buy'.

JP Morgan has lifted its target price for Spirax-Sarco, saying that the engineering group's recent share-price weakness has been unwarranted.

The bank upped its target price for the shares from 11,300p to 11,500p and maintained an 'overweight' position on the stock.

Since the company reported its interim results on 10 August, the stock has fallen 9% on investor concerns that guidance for the full year remains too high.

"We conclude that investor caution is overdone and risk/reward is skewed to the upside," said analyst Lushanthan Mahendrarajah in a research note on Friday.

"Spirax-Sarco is a world-leading thermal energy management and niche pumping group, comprising three specialist engineering businesses. The group is well placed to help its diverse customer base improve their production efficiency, meet their environmental sustainability targets and improve the quality of their products."

Deutsche Bank has lifted target prices across the whole European beverages sector, recommending investors to "buy beer, stick with soft, stay selective [on] spirits".

"Brewers and soft drinks offer an attractive combination of resilient demand and cost tailwinds," Deutsche Bank said.

"Spirits face greater cyclical risk, inventory overhang and have less input cost benefit yet continue to be more fully valued despite underperformance. After two years of material input cost headwinds we expect 2024 to be a year of input cost deflation and see this as a significant tailwind for brewers and soft drinks players if pricing holds - as it has in the past."

The bank rates Carlsberg and Campari Group as its key 'buys' across its European coverage.

As for UK-listed stocks, soft drinks group Britvic is rated a 'hold', though its target price has been lifted from 865p to 870p. A 'sell' stance was maintained for Smirnoff and Baileys owner Diageo, but the target price rose from 2,920p to 2,950p.