With heavyweight stocks including BP (BP.), Glencore (GLEN), AstraZeneca (AZN) and Vodafone (VOD), the latest European Top Picks list from Barclays (BARC) certainly packs a punch.
But the 23-strong line up isn’t just about the big boys. There’s plenty of other talking points, from the inclusion of newly-merged Standard Life Aberdeen (SLA) to the forecast of more share price records for Sunbelt owner Ashtead (AHT).
Prudential (PRU) is another interesting inclusion, given that the equity research team at Barclays are in the camp backing shares to finally break £20.
Across the 23 stocks and based on mid-December prices, there’s an average upside potential to the Barclays target price of 17.5%, yielding 3% and trading on an average 2018 price/earnings (PE) multiple. The average price target of the top picks is 8% above the City’s consensus.
Overall, the list is heavily focused on the industrials sector with eight stocks, including CRH (CRH), Crest Nicholson (CRST) and Ferguson (FERG), formerly Wolseley.
There’s also a new entry from The Gym Group (GYM), which replaces WH Smith (SMWH) as the top pick within the UK mid and small cap leisure and consumer sector. The low-cost gym operator has succeeded in disrupting the market with its flexible offer where consumers can join online with no ongoing contract.
With Barclays less keen on using PE in the case of The Gym Group, the 14% upside in the target price to 250p is based on 10 times enterprise value (EV).
At the other end of the corporate scale, Vodafone has the support of Barclays against those who question the sustainability of its projected 6% dividend yield.
Barclays also presents counter arguments to concerns about Vodafone’s ability to monetize data and to deal with the competitive and strategic risks posed by convergence.
The bank’s analysts said: “We see this as a rear-view mirror way of looking at Vodafone, with shares stuck in a 200p-230p trading range.
“With an EBITDA compound annual growth rate of 4% to 5% in the next three years and positive revenue/cost momentum, we believe the arguments are far less relevant.”
Barclays has only recently added Vodafone to its list, with estimates from the bank showing the mobile phone company trading on a 21 PE based on 2019 forecast earnings. It has a price target of 280p, ranging from 190p to 300p.
Prudential is the top pick in European insurance as Barclays believes that the multiple of 12.1 FY2018 earnings discounts its expected annual growth rate of 8% over the next five years.
The price target of 2161p values the stock at 14 times 2018 earnings, although as the Asian business alone is worth 1458p a share the upside valuation is 2297p.
Shares in Standard Life Aberdeen have struggled for momentum since the insurer’s merger in the summer. That’s reflected recent disappointment over outflows from higher margin GARS and emerging markets funds.
But on the plus side, there’s the potential for capital returns from sales of stakes in Indian joint ventures and the prospect that flows will start to improve. Barclays expects £150 million of synergies by 2019 and an operating margin of 43%, leading to the bank’s valuation of 15.5 PE and a price target of 520p.
Ashtead has been trading near record highs, but Barclays believes there’s still more to come from the FTSE 100 (UKX)-listed equipment rental business.
Ashtead’s shares are trading on an EV multiple of 6.9, which Barclays says is appropriate for this stage in the cycle: “We continue to believe that a cyclical de-rating of the shares remains some way off.”
The bank has a target price of 2263p, with modest growth in US non-residential construction expected to support continued market growth at Ashtead over the next few years.
The target prices for the other UK-listed stocks are: Glencore (400p), BP (675p), AstraZeneca (6,300p), Crest Nicholson (662p), Ferguson (6,000p), Qinetiq (QQ.) (265p) and Paddy Power Betfair (PPB) (9,400p).
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.