Ringing the changes
As customers warm to quad-play packages of landline, mobile, broadband and Pay-TV, the traditional FTSE industry segments of fixed line telecommunications, mobile telecommunications and broadcasting & entertainment are looking increasingly outdated.
Views vary on the relative prospects of the big FTSE 100 players in these segments BT, Vodafone and Sky in a fast-changing environment, but BT has the edge, if City sentiment is to be believed. According to data provider Digital Look, 59% of brokers rate BT a Buy, compared with 54% for Vodafone and just 19% for Sky. Also, there are fewer out-and-out bears on BT.
The BT bulls see the company reaping the rewards of its aggressive move into TV and mobile. Analysts at Berenberg, for example, reckon BT will be generating normalised free cash flow of 3.8bn within three years up 35% from a current 2.8bn. Berenberg reckon BTs free cash flow yield of 8.4% (based on a market capitalisation of 45bn after the acquisition of EE) is one of the most attractive in the sector.
Last years merger of Carphone Warehouse and Dixons Retail (Currys/PC World) was warmly greeted by the market. Even though the shares of Dixons Carphone have risen strongly since the merger, City analysts remain resoundingly positive on the stock.
The company said in a Q4 trading update last week that it now expects profits for the full year to be above the top end of its previous guidance range. Despite a price-to-earnings (P/E) ratio in the high teens, Citigroup and Barclays both reiterated their positive stance on the stock, raising their price targets to 535p and 540p, respectively.
Meanwhile, analysts at Numis, who have an Add recommendation and 530p target, commented: Although we think a P/E premium would be hard to sustain over the medium-term due to the industry margin structure, we still see upside to forecasts and remain positive.
The Primark powerhouse
Associated British Foods (ABF) owns several different food businesses, which own a number of strong brands. However, the jewel in ABFs crown is the hugely successful discount fashion chain Primark. The prospects for Primark have recently led a couple of heavyweight brokers to join what was already a bullish camp on the company.
Goldman Sachs opted for no half-measures in switching its recommendation from Sell to Buy in one fell swoop. The broker reckons that while ABF trades on a premium forward P/E of 28, the shares have de-rated by 20% relative to the consumer staples sector since December. GSs analysts believe Primarks launch in the US market this September is set to be a success, and the broker has lifted its price target from 2,755p to 3,120p.
HSBC, which initiated coverage of ABF last week, is even more bullish with a Buy recommendation and 3,680p price target. HSBC also cites Primarks launch in the US as a major factor in its thesis. With continuing success in European expansion and an even faster roll-out in the US, HSBCs analysts expect ABFs earnings to rise by 97% in the next five years.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.