Broker tips: Dr. Martens, Mobico, Auto Trader

Goldman Sachs downgraded Dr Martens to ‘sell’ from ‘neutral’ on Tuesday and cut the price target to 87p from 93p.

Given continued weakness in trading commentary from peers (VF Corp, WWW, GCO) we see a soft boots industry backdrop persisting into FY25, and a propensity to invest through the cycle driving margin pressure (GSe 8% below FY25E EBIT consensus)," it said.

Goldman noted that a key driver of Dr Martens’ Dec-23 revenue downgrade to FY24 expectations was softness in the broader boots category - particularly in the US - impacting both wholesale revenues and retail like-for-like growth.

"Looking forward, we now expect this to continue into FY25, noting that boots peer Timberland believes that US inventory levels in Dec-23 remain higher than targets, with other footwear peers WWW and GCO outlining soft revenue guidance for CY24/FY25.

"Hence, we expect that a stabilisation in category trends (as seen in Google Trends data) may take some time, given that the next key wholesale stocking period is circa six months away (Sep-Q)."

Auto Trader slumped on Tuesday as JPMorgan Cazenove placed the shares on ‘negative catalyst watch’ ahead of FY24 results in May.

JPM kept the shares at ‘underweight’ with a 608p price target.

It noted that a key premise to its downgrade to UW last year was easing momentum in the core business, a lack of financial bearing from Digital Retailing initiatives, and an unattractive valuation.

"We now see an increasingly challenging market backdrop coming to the fore - following six months of falling used car prices (accelerating to -8% in February 2024) and meaningful margin erosion for UK retailers - which we expect to temper consensus expectations on the core marketplace business," it said.

"Coupled with continued disappointments on the digital agenda - Autorama - we see building risk to consensus FY25 earnings expectations which we expect to weigh on the shares into FY24 results (May 30th) and place the shares on negative catalyst watch into the earnings season."

JPM said that while the stock has underperformed year-to-date, up 3% versus a Classifieds peer set up 9%, it sees further legs to the recent share price underperformance "with a tougher market backdrop for 2024 along with higher-than-expected losses in Autorama, both of which we expect to weigh on company consensus FY25 earnings expectations and yield a cautious guidance for the year".

The bank cut its FY25 adjusted earnings per share estimate by 2%, screening 7% below consensus, with downside risk to Autorama and the core Auto Trader margin.

RBC Capital Markets downgraded Mobico on Tuesday to ‘sector perform’ from ‘outperform’ and cut the price target to 80p from 110p following the company’s update a day earlier.

The bank said it was cutting its adjusted EBIT forecasts - mostly in German Rail - and incorporating a further £95m of provisions in its EV-to-equity bridge, following the statement yesterday.

RBC said it sees more attractive risk-reward elsewhere, hence the downgrade.

"Other stocks in the sector are trading on larger discounts to long-term average EV valuation multiples (on earnings forecasts which have a better recent track record of being delivered or exceeded)," it noted.

The bank said it still expects share price upside on a 12-month view, and its downgrade could prove wrong in the event of a favourable disposal scenario, or if further share purchases by the largest shareholder drive up the shares.

"However, we think suppressed valuation multiples elsewhere in the transport sector, and recent track record of downgrades limit scope for multiple expansion in a disposal scenario.

"We show inside one North American School Bus disposal scenario offering upside just over around 90p, above our price target of circa 80p.

"We do not think this offers sufficient upside to warrant an outperform recommendation given above-average risk and limited visibility over earnings and cash flows."

Mobico was formerly known as National Express.