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Markets are called to open flat this morning. This is what's happening today:
Alcoa kicks off Q4 reporting season after the close today with the majority of the remaining companies reporting in late January through mid-February. Barclays are equal weight (neutral) on Alcoa with a price target of $10/share. Barclays are neutral on Alcoa because they believe the Company is positioned to benefit in the long-term from moving down the cost curve in alumina and aluminum and from repricing of alumina to spot. However, Barclays also believes improvements will take time and low leverage to aluminum prices will be a headwind.
Since earning season is kicking in today, I'd like to talk about a sector that has been performing well and is expected to continue doing so – the luxury goods sector. Do not forget that when the crisis started in 2007, companies in the luxury goods industry performed pretty well compared to other industries because the super rich continue spending no matter what state the economy is in. Barclays are bullish on three names one of which has been in the CC equity list for quite some time now (PPR). Here is Barclays' view on the sector and a short paragraph of their 3 top picks in the luxury sector.
We believe that the luxury sector is set for another robust year of trading following macro stabilisation in China and a resolution of the US fiscal cliff. However, the recent strong share prices have left valuations at levels that reflect a good deal of this growth, in our view, and with Q1 having the toughest comps, we believe a period of consolidation in the short term is likely. We see any improvement in domestic trading in China coupled with strong tourism spending as key for the sector to perform. At this stage we therefore prefer to invest in companies in the sector with valuation support, catalysts or self help – Richemont, PPR and Luxottica are our preferred picks.
Preview Q4 sales. We forecast robust trends of high single to low double-digit growth. This reflects a slight acceleration from Q3 mainly due to the higher weighting of retail in Q4 which is outperforming wholesale. However, given no material uptick in trading and current valuations we do not see it as a significant catalyst.
Hard Luxury stands out to us as a pocket of value with Richemont our preferred pick. We see concerns over the impact of destocking in China as overdone and upgrade our price target for Richemont from CHF 82 to CHF 86 and for Swatch from CHF 470 to CHF 510.
PPR remains one of our top picks with valuation support and future catalysts. We see the demerger of Fnac and disposal of the remainder of Redcats as refocusing the market on the new PPR which we believe has the potential to grow earnings mid teens (in line with the sector). Despite this, it trades today on just 14.5x 2013E PE.
Luxottica benefits from self help. We have raised our PT to €37 ahead of a year where we expect strong growth from the Armani contract and Brazil. We are wary of a tough Q1 comparative against the Coach sell-in but remain positive long term.
For further information on these stocks or other stocks and bonds, contact our offices on 25688688.
Good day and happy trading!
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