Broker tips: Pearson, French Connection, Reckitt Benckiser

LONDON (ShareCast) - Publishing and education group Pearson (Xetra: 858266 - news) has been downgraded by broker Numis on valuation grounds, despite a first-quarter statement that was in line with forecasts. The broker noted no surprises in the trading update, which is a "very small" quarter in the context of the strongly second-half-weighted year, with management also confirming full-year guidance in spite of the 1% fall in underlying revenues.

"All in, no surprises and would not expect any major change to consensus on this statement, though clearly the strong US dollar is helpful for Pearson," analyst Gareth Davies wrote.

"Pearson shares have had a strong run in the first four months of this year, we feel are fully valued at current levels," he added. While making no change to his price target of 1,265p, the stock valuation means his recommendation moves to 'reduce' from 'hold'.

Davies said he preferred others in the B2B space, namely publishers Informa (Other OTC: IFJPY - news) and Daily Mail & General Trust together with exhibitions group ITE Group (LSE: ITE.L - news) .

Reckitt Benckiser Group rallied as the maker of Dettol handwash and Durex condoms reported a rise in first-quarter revenue that exceeded analysts' estimates, with broker Canaccord raising its target price by 100p.

The group's first quarter rose 1% to £2.22bn in the first three months of 2015.

Chief executive Rakesh Kapoor said the consumer health-brands division continued to deliver growth.

With the health division was driven by an increase in cold and flu season, Cannccord Genuity said the results were "not to be sneezed at" .

"The cost savings project, Supercharge, has begun successfully and should help to support the operating margin delivery." However, despite this broadly good performance, Canacord retained its 'sell' stance on the shares given the full year P/E ratio of 24 times and EV/EBITDA ratio of 18 times.

The broker raised its target price to 4,600 to 4,500p.

Numis put its recommendation on French Connection (LSE: FCCN.L - news) under review after the clothing retailer reported a tough first half trading and warned on flagged full year 2016 profits.

The broker reduced its profit before tax forecast from £0.3m profit to an underlying loss of £3.5m.

The company reported weak trading in the retail division indicated at March's results had continued through the Easter period, with first-half retail now expected to be materially below expectations.

The store closure programme will therefore be accelerated, with six or seven outlets to be closed during the full year.

On the upside, wholesale revenues were higher year-on-year, in line with expectations, and licensing continues to perform strongly.

The PBT forecast was downgraded using the assumption that the negative trend in retail LFLs seen in quarter-four has broadly continued through the first half, with some adverse margin impact, excluding losses on store disposals and closures.

Numis still expect the year-end balance sheet to be in net cash and the management to continue to implement its improvement strategy.