HSBC Downgrades Burberry, Says It's 'Harder To Pound The Table' Now

Burberry Group plc BRBY is down more than 6 percent on Wednesday following a downgrade by HSBC.

According to the research report, the recent price rebound in the stock is "not justified."

"The recent GBP weakness mechanically means that FY March 17 should see positive FX impacts of 4 percent on sales and 10 percent EBIT (GBP40 million according to our estimate)," the analysts expounded.

Downgrade To Hold; Price Target Raised

In addition to the currency's weakness, limited cost-cutting and the potential for cash return combine for impacted estimates, but limited justification for the stock's relative upward movement recently.

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"Burberry shares have risen by more than 20 percent since 21 January 2016. The above-mentioned GBP weakness and incremental cost-cutting lead us to raise our FY March 16-18e estimates by 2–10 percent (FX alone has a 2–7 percent impact), ie significantly less than the share price movement," according to HSBC. "We believe the excessive de-rating of the stock has now been corrected."

The analysts further explained that on the back of an increased estimate, the price target has been adjusted from 1,380p to 1,500p, implying a 3.4 percent upside and moving the issue from Buy to Hold.

Key Upside (Downside) Risks

HSBC highlighted the following four risks:

• "A stronger (weaker)-than-expected innovation pipeline;
• "A better (weaker) development of the Japanese business taken over form the licensee;
• "FX (GBP) becoming weaker (stronger);
• "The perception of Burberry as a takeover target is an upside risk."