Over the past week, brokers in the FNArena database have made three upgrades while downgrading seven. Overall, two were rated Buy and three, Sell. Total Buy ratings now stand at 51.66%.
Upgrades
Among the upgrades were David Jones (DJS), with Macquarie moving to a Buy. This reflects the view a relief rally is possible because the downgraded earnings outlook is now in the price and issues on the credit card side of the business has now become exposed. The broker says this has driven down the share price and leaves scope for a bounce.
Others in the market reacted to the interim profit result and weak guidance far more harshly, with UBS, Deutsche Bank and RBS Australia all downgrading DJs to Sell.
UBS continues to see downside earnings risk and suggests there is limited value at current levels. Deutsche Bank also sees some execution risk as DJs attempts to restructure its operations, while RBS Australia suggests the re-basing of earnings over the next few years is not fully priced into the stock.
Macquarie also upgraded News Corporation (NWS) during the week, lifting its rating to Neutral as the sale of NDS was factored into its model. For Macquarie the sale is a positive for the valuation of News, which when added to the removal of a discount for regulatory uncertainty sees the broker move to a less negative view.
Sigma Pharmaceuticals (SIP) reported full year earnings this week and while metrics improved, the consensus view is the industry outlook remains difficult. Deutsche is the only broker in the database to rate Sigma as a Buy, seeing scope for additional earnings growth and capital management in coming periods. Neutral and Sell ratings remain dominant for Sigma.
Downgrades
Among the downgrades, RBS Australia cut its recommendation on Graincorp (GNC) to Neutral. Potential for the company to be involved in corporate activity given consolidation in the sector could be positive for valuation, but in RBS’s view this is priced-in at current levels. The downgrade is therefore a valuation call.
RBS also lowered its rating on Nexus Energy (NXS) to Neutral after the group’s Longtom project review. The downgrade in its reserves creates uncertainty.
While Reckon (RKN) will save some royalties from the ending of its relationship with Intuit, the flipside in Macquarie’s view is that it will need to spend more on research and development to compete with peers. There is also the risk of some customer leakage from the decision, which reinforces the broker’s downgrade to a Sell.
For UBS, the completion of the de-merger of Telecom New Zealand (TEL) means the market should now focus on the growth outlook, which is not overly positive. While mobiles are performing well, this won’t be enough to offset broader declines. This implies the market is overpaying for growth at current levels. This has seen UBS downgrade it to a Sell.
Changes to earnings forecasts (EF)
Note: FNArena [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.
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Also in the Switzer Super Report
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- Tony Negline: How to move a business property into your SMSF [5]