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Stock Watch: Whitbread, Reckitt Benckiser, AstraZeneca & WPP

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

Whitbread’s (WTB) decision to streamline its business and re-focus itself as a hotel chain operator may have been thought through, but you can’t say its timing has been all that great.

With half its Premier Inn revenue dependent on business travellers, and 80% of its hotel stock in the UK, Whitbread has been hit hard by Brexit uncertainty. Its fourth quarter like-for-like revenue per available room was down more than 5% at the last count. There are plans underway to make in-roads into the potentially lucrative German market, but it’s going to be some time before that contributes to the company’s bottom line, in any meaningful way.

The company sold Costa Coffee last August for £3.9 billion and has been keeping shareholders sweet by steadily returning the proceeds of the sale to them, through a £500 million share buyback and £2 billion tender offer. That was completed at the end of July, but while share buybacks often help to lift a company’s share price, because they reduce the amount of stock in circulation, producing a short-term boost to earnings per share, that didn’t happen here.

After Whitbread reported much lower than expected revenue in the three months to the end of February, further weakness in March and April, and coupled that with no new guidance on its previously flat profit forecasts, investors appear to have started to lose their patience.

Brokers too. Barclays has said Whitbread’s “muddled” investment case does not match a valuation of 19 times its 2020 earnings, compared with 10 times in previous slow-downs.

And it seems even the timing of its first-half results - due on Tuesday, just nine days before the Brexit deadline - could be a negative too, according to Barclays analysts.

They don’t see Whitbread as a total write-off. Far from it. Barclays says it remains “an attractive long-term growth story” and could well become a takeover target, following CKA’s bid for pub operator Greene King. But for now, “the utter lack of visibility around Brexit” is too big to ignore. It has downgraded Whitbread from “overweight” to “equal weight” and set a £43.50-a-share target price.

And Barclays is not alone in its cautious view. There have been a flurry of broker downgrades since the end of September

Jeffries International, echoes Barclays’ Brexit worries and says a lack of short-term catalysts, and a long path before German expansion produces any meaningful contribution to the group, makes the shares a “hold” and has set a £45 target.

Liberum Capital also rates them a hold, but has cut its price target from £46 to £39. RBC Capital Markets has repeated its underperform investment rating and cut its price target from £45 to £38. While Deutsche Bank says the shares are now a straight sell.

Now, odds are that Reckitt Benckiser’s (RB.) trading update on Tuesday will make for more unhappy shareholders.

Its shares have already fallen on worries that its third-quarter results will disappoint, after Morgan Stanley and JPMorgan Cazenove both told clients to prepare for a less-than-upbeat update from the Dettol-maker.

Both brokers expect Reckitt’s full-year sales growth to be at the lower end of the 2%-3% range it set in July. A “relatively subdued” quarter, makes full-year guidance “challenging”, said Morgan Stanley.

Barclays Capital remains overweight but has cut its price target to £75. Deutsche Bank has repeated its buy rating, but also cut its price target - from £77.50 to £75.

As anyone who has every invested in the world of biotech and pharmaceuticals will know all too well - companies live or die by the success of their clinical trials. Over the summer AstraZeneca (AZN) was riding high. In fact, it hit a record high on the back of two positive trial updates.

The pharmaceuticals group revealed that as well as final-stage trials for its diabetes drug, Farxiga, showing it was also beneficial to patients with heart and cardiovascular problems, positive news about its Brilinta treatment when taken alongside aspirin, sent the shares soaring.

Broker Kepler Cheuvreux called the diabetes drug trial results “exceptional” and said consensus forecasts of drug sales topping some $2.5 billion in 2024 looked far too conservative in light of the latest results.

Analysts said: “The very consistent benefit — an impressive 26% reduction in heart failure or cardiovascular death — plus a clean safety profile, should mean at least $1 billion upside”.

The party came to a screeching halt though when the US Food and Drug Administration rejected AstraZeneca’s application for a lung-disease treatment at the start of this month, news which sent the shares back down 2% to £71.19.

Third quarter results due out on Thursday should tell us more and also possibly provide further news on the sale of commercial rights for its heartburn treatment to a German company for up to $276 million.

AstraZeneca’s shares are currently trading around £68.85.

Finally, on Friday we get a trading update from WPP (WPP), the advertising giant appears to be really struggling to step out of its founder Sir Martin Sorrell’s very large shadow.

Sir Martin may have left the company he started under a cloud but he’s not the shy and retiring type and has just revealed that his new company, S4 Capital, the digital-only business he launched in May 2018, just a month after being forced out of WPP, is on the acquisition trail. It’s snapped up Silicon Valley-based digital marketing agency Firewood in a deal that values it at a cool $150 million and marks S4 Capital’s arrival in the US.

Meanwhile WPP, which is going through more of a consolidation than acquisition phase, posted a 44% slide in first-half profits. It blamed shrinking margins and a one-off gain in the previous year, for the slide from £846 million to £478 million pounds.

Brokers seem quietly confident. JP Morgan Cazenove remains overweight on the stock and has raised its price target to £11.25 while Deutsche Bank remains a buyer and has a target price of £10.90 in place. WPP’s shares are currently hovering around 950p.

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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