Shares in Burberry rally 5.3 percent to top the FTSE 100 leaderboard, after the luxury goods company's third-quarter revenues beat forecasts, prompting Bank of America Merrill Lynch to upgrade the company to "buy" from "neutral".
BofA Merrill Lynch also raises its earnings forecasts by up to 4 percent and highlights the potential for a share buyback.
The 157-year-old seller of raincoats and leather goods, known for its camel, red and black check pattern, assuaged fears of a slowdown among its consumer base following its recent profit warning, saying it made 613 million pounds ($985 million) of revenues in the three months to Dec. 31.
"The key good news is the recovery of retail (sales) like-for-likes from 1 percent in the previous quarter to 6 percent in Q3," BofA ML says in a note. "Given the concerns surrounding the brand since the profit warning, this acceleration should support sentiment in the shares."
Tuesday's share price hike in early trade has restored Burberry to its September levels, when its profit warning hammered the stock.
Despite its relatively high forward 12-month price-to-earnnigs rating of 17.9 times, top-rated analysts in the sector expect Burberry to post a positive earnings surprise of 1.6 percent over the next 12-months, second only to Swiss watch-maker Swatch among peers.
BofA ML sees four reasons to own Burberry: it has the easiest comparison basis of the sector in 2014, ML expects currency rates to turn more supportive compared to its peers which report in the euro currency, its net cash position leaves room to return cash to shareholders and while it sees the internalization of the perfume business to be neutral to earnings in 2014, history shows that Burberry tends to plan cautiously and execute well, writes BofA ML.
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