Broker tips: Rio Tinto, Spirent Communications, Compass

(Sharecast News) - JPMorgan Cazenove upgraded Rio Tinto on Tuesday as it took a look at metals and mining stocks.

The bank said it was 'neutral' on EMEA metals and mining into next year but said it believes a mixed macro outlook presents an opportunity for investors to re-examine long-term structural themes in the sector, which can drive relative outperformance for select companies.

"Notably, we believe emerging costs of carbon (both explicit & implicit) could drive structural shifts in certain subsectors (aluminium, iron & steel, coking coal) & offer significant opportunities for those miners positioned as: 1) low CO2 producers in high CO2 intensive sectors & 2) incumbents where restrictions could drive supply/demand tightening," said JPM.

Among the iron ore-dominated diversified firms, JPM upgraded Rio to 'overweight' from 'neutral', citing iron ore and free cash flow yield resilience.

Numis hiked its price target on Spirent Communications on Tuesday to 155p from 95p on the back of upgraded forecasts.

"This is +39% versus the stock's last closing price, so we also up our rating from hold to buy," said the analysts.

Numis said it thinks Spirent expects trading in the telco sector - which makes up around 70% of its business - to be no better or worse in FY24. Its prospects remain strong when telcos can no longer continue to sweat their assets, or some break rank to gain share, it noted.

"So SPT is urgently pivoting to non-telco sectors for sales growth and managing costs carefully, in part by fundamentally streamlining itself, without cutting any of the R&D that serves its future," it said.

Analysts at Berenberg lowered their target price on contract food service company Compass Group from 2,385.0p to 2,320.0p on Tuesday but said its "strong operating profit growth" looked set to continue.

Berenberg said Compass was a best-in-class operator that was well-positioned to benefit in the long term from structural trends in the industry.

The German bank stated Compass' main KPIs - notably organic growth, retention rates, and net new business - were currently outperforming historical averages, something it thinks justifies optimism about a rebased higher organic growth outlook.

"While the shares are slightly down since the company's last update, we remain optimistic about the future industry trends that will benefit Compass, which, coupled with a healthy balance sheet, give plenty of opportunity for growth and cash generation," said Berenberg.

Berenberg adjusted its numbers for Compass due to its change in reporting currency from GBP to USD and 2023 full-year results but stood by its 'buy' rating on the stock.

"Looking ahead, we remain confident in the FY24 outlook for high single-digit organic revenue growth (Berenberg 8.5%) and operating margin progression (we forecast 6.95% for FY24)."