Citigroup strategists have advised investors across the globe to have a good look at their portfolios and reconsider those companies for which Europe represents a substantial part of sales and profits. In Australia, Citi highlighted three familiar names: Cochlear (COH), Goodman Group (GMG) and QBE Insurance (QBE). The implication here is that forecasts for these companies will increasingly come under pressure next year and this is likely to weight on the share price.
On the other hand, suggest those same strategists, these stocks are also likely to rally at times of euro-optimism, offering a different perspective for market participants who aim to play short-term price movements.
The past week has seen double the number of downgrades to upgrades by brokers in the FNArena database, with 10 ratings lowered and just five increased. Total Buy recommendations now stand at 57.1%, down from 57.4% last week.
Upgrades
Among the upgrades were Bathurst Resources (BTU), where Credit Suisse moved to an Outperform rating from Neutral given a view the smaller cap plays are now the more attractive in the Australian coal sector. Bathurst’s overall rating also benefited from Citi initiating coverage with a Buy rating.
A recent profit warning saw the Fletcher Building (FBU) share price suffer, but in JP Morgan’s view the sell-off was overdone. On valuation grounds, the broker upgraded it to an Overweight from Neutral despite a cut in its price target.
Iluka (ILU) has announced better-than-expected titanium oxide price increases, which has forced brokers across the market to lift earnings estimates and price targets. The changes suggest some upside remains for the stock, enough for RBS Australia to upgrade to a Buy rating from Hold.
A US asset sale by Investa Office (IOF) was well received by the market given a price in excess of book value. The sale saw it upgraded to a Buy given the potential valuation upside from further asset sales.
Management at Peet (PPC) offered cautious commentary at the group’s AGM this week and the market reacted by pushing down the stock. The falls have been overdone according to Citi, which has upgraded it to a Buy.
Downgrades
Among the downgrades was Adelaide Brighton (ABC), with JP Morgan cutting its rating to Neutral from Overweight following relative outperformance. This is a valuation call as the stock is now trading close to the broker’s price target.
Clough (CLO) has reported some cost overruns and margin pressure on two contracts, enough for RBS Australia to downgrade it to a Hold, again a valuation call on the part of the broker.
Valuation is also behind Credit Suisse’s downgrade of Gloucester Coal (GCL) to Neutral following recent share price outperformance.
With earnings to be impacted by some one-offs, UBS has cut forecasts for HFA Holdings (HFA). A lack of positive momentum has caused the broker downgrade it to Neutral.
A lack of positive catalysts is also behind Citi’s downgrade of Hills Industries (HIL), as earnings are still being impacted by the strong Australian dollar and ongoing challenges in the building industry.
Deutsche Bank has lowered forecasts for Newcrest (NCM) given changes to production expectations, with these changes seeing a reduction in price target. On valuation grounds, the broker has moved to a Hold from Buy, the only non-Buy recommendation on Newcrest in the FNArena database.
Demand for IT services is expected to remain subdued given weak domestic economic growth and to reflect this Macquarie sees scope for some contract cancellations. This is likely to impact on earnings for Oakton (OKN), so the broker has downgraded it to Neutral.
A solid run in Programmed Maintenance (PRG) shares has seen Citi downgrade it to Neutral on valuation grounds. The downgrade comes despite a modest increase in price target. Citi has also downgraded Transurban (TCL) to Neutral on the same basis.
United Group (UGL) has acquired the DTZ trading assets and this offers the company a European property footprint. Despite this, RBS Australia sees a slower rate of margin improvement going forward, enough to downgrade it to Hold. Targets for the stock have risen overall to reflect the impact of the acquisition.
Note: FNArena.com [1] monitors eight leading stockbrokers on a daily basis. The eight experts are: BA-Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, RBS and UBS.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in the Switzer Super Report
- Peter Switzer: What Europe needs to do next [2]
- Paul Rickard: Road test: St.George Super Fund Home Loan [3]
- Tony Negline: How market-linked income streams work [4]