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On Wednesday, Barclays (LON:BARC) analysts downgraded Grainger Plc (GRI:LN) stock from Overweight to Equalweight. The analysts also adjusted the price target to £2.25 from £2.70.
The analysts noted that despite Grainger’s solid growth prospects, with an estimated earnings per share compound annual growth rate of 14% from fiscal year 2024 to 2029, the market has not fully recognized this potential. They attributed this to the company’s low initial earnings yield, projected to be around 2.6% in fiscal year 2025, increasing to 4.6% by fiscal year 2029.
Barclays highlighted the impending Real Estate Investment Trust (REIT) conversion as a significant factor influencing their decision. They pointed out that after the conversion, the growth rate is expected to drop to 5% over the fiscal years 2026 to 2029, with refinancing challenges anticipated from fiscal year 2028 onwards.
The analysts expressed concerns that following the REIT conversion, the cost of debt might exceed the portfolio yield, leading to a lower growth profile. They foresee the shares trading at a higher earnings yield of approximately 4-5% post-conversion, compared to the recent 2-3% range.
In light of these factors, Barclays decided to downgrade Grainger’s stock rating to Equalweight.
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