MARKETS SPECTATOR: DJs price tag

Following David Jones' stronger-than-expected result for the first half of 2013 yesterday, which saw the stock jump more than 4 per cent, JPMorgan has moved to upgrade the stock to neutral from underweight given increasing confidence in the company’s Future Strategic Direction.

The broker noted that first-half net profit after tax of $73.5 million was ahead of consensus ($70.7 million) and JPMorgan forecasts of $66.8 million while cost of doing business/sales growth and gross margin expansion was not as strong as it had been expecting.

“The key driver was lower growth in cost of doing business/sales, only up 270 bps versus our forecasts of 400 bps and a second-half 2012 figure of 560 bps, while gross margin expansion was a strong 110 bps, but below its forecasts of 150 bps. A fully franked interim dividend was 10.0cps, ahead of our estimated 8.5cps. Following this result, we revise our normalised EPS forecast by 4.8 per cent, 4.5 per cent and 6.0 per cent for 2013, '14 and '15, respectively”, JPMorgan said in a note to clients.

The upgrade from underweight to neutral is premised on increased confidence on the Future Strategic Direction turnaround, with more detail being provided on the EBIT drivers, which includes a move towards higher quality sales and further cost-of-doing-business management. The broker also believes the stock has modest valuation support of $2.94 per share, despite the relatively high price-to-earnings multiple and notes that despite the recent share price strength, the stock has still underperformed over the last 12 months.