Burberry (BRBY)
Jelena Sokolova
Burberry's position is challenged as it is a mono-brand company with a high proportion of sales in shorter-life product categories with lower barriers to entry. As a result we have slightly downgraded our fair value estimate to £16.40 per share, and changed the stock’s economic moat rating from wide to narrow.
While Burberry is the category leader in specific niches these areas constitute less than 50% of revenue, and their growth is limited because of exclusivity perceptions and the economic cycle. Non-outerwear apparel is a competitive and fragmented space, where the fashion cycle is faster and the product arguably matters more than the brand in purchasing decisions.
Leather accessories is a highly aspirational category, with longer product cycles and potential to communicate the brand through logos or recognizable shapes. However, the Burberry brand is less established in this category relative to category leaders, such as Louis Vuitton, Prada, and Gucci. Burberry will have to continuously introduce products more appealing to consumers to win in this category, which is a challenging task, in our view.
Additionally, over the past 10 years, the Burberry brand has entered a higher price category, relative to where it used to trade historically. It is priced almost on par with the better-established luxury peers, without the benefit of long-standing customer price perception.
Anglo American (AAL)
David Wang
Anglo American reported decent first-quarter 2017 production results, with copper equivalent production increasing 9% year on year. Production growth in diamonds, iron ore, met coal, and thermal coal were partly offset by declines in copper and nickel. We continue to contend Anglo American shares are significantly overvalued and will sell off with lower iron ore and met coal prices. We do not plan to make any changes to our £4.30 per share fair value estimate.
Iron ore prices have already begun to sell off, down about 18% since April 2017. We continue to see further downside for leveraged bulk commodity miners Anglo American, Teck Resources, and Vale.
National Grid (NG.)
Travis Miller
We are reaffirming our £10.20 per share fair value estimates for National Grid after the board of directors announced a 84p per share special dividend, in part to return proceeds from the 61% interest in its gas distribution business that it sold in December. The company closed the sale on March 31.
This is slightly lower than our forecast special dividend, but National Grid has been making share repurchases that bring its total return of capital in line with our expectations and management's guidance. Management chose a £3 billion special dividend and £1 billion return of capital through share repurchases.
We think management's decision to return all of the proceeds plus additional capital to shareholders represents good stewardship. Management's proposed a 1% dividend increase in 2017, and its similar growth outlook, given modest inflation, lags far behind the dividend growth we expect from most other regulated European and U.S. utilities.
