Broker actions have so far this week been firmly stacked to the downside as analysts do not seem to have liked interim earnings numbers. For those companies that managed to meet price expectations, the general consensus is that they are too expensive already.
In the good books
Morgans upgraded REA Group to Add from Hold to reflect the recent decline in the share price and a higher level of confidence in full year earnings forecasts. The broker considers the sell off after the results was an over-reaction that now leaves the price underestimating the potential for further upgrades.
In the not-so-good books
Citi downgraded BWP Trust to Sell from Neutral. Citi analysts saw a solid, in-line result with plenty to like, and growth should remain on offer. It’s just that the share price is way too rich for the analysts.
Citi and JP Morgan both downgraded the Commonwealth Bank from Sell and Underweight to Neutral. Citi analysts saw a “typical” financial result from CBA: strong, forcing upgrades to future growth projections, but the analysts maintain that in the end, growth will still be slower in the future and this means the valuation is too high. The bank’s first half result was above JP Morgan’s forecasts. The broker is forecasting a further 100 basis points contraction over the next two years in returns on tangible equity and this is a key driver of valuation, which is 13% below the current share price. JP Morgan’s forecast decline in returns is based on the changing composition of earnings growth – from provisions and margin improvements to volume, in addition to known regulatory capital headwinds.
Deutsche Bank downgraded Cochlear to Sell from Hold. First half sales fell short of the broker’s expectations while revenue was in line, as stronger upgrade sales offset the weaker unit numbers. Deutsche Bank notes difficult market conditions are being faced and while a recovery in the second half seems likely, sales growth has now been lacklustre for four years. Despite expecting a sustained and relatively dramatic recovery in unit growth, Deutsche Bank struggles to justify the share price.
Citi downgraded Oil Search to Sell from Hold. Citi’s desk of commodity specialists has taken a negative view on oil prices, short term, and a cautious view beyond the next few months, warning investors there is a real chance oil prices might be in for an extended “lower for longer” era. On this basis, the risks are seen as to the downside.
Credit Suisse downgraded Santos (STO) to Underperform from Neutral. The broker upgraded Santos to Neutral from Underperform after its big oil-related price fall but now that the price has bounced, it’s back to Underperform. Balance sheet strains, a reserve downgrade at QCLNG and Santos continuing to guide to far lower sustainable capex numbers for GLNG than QCLNG suggest to the broker risk/reward is again “firmly” stacked to the downside.
JP Morgan downgraded Suncorp Group to Underweight from Neutral. Whilst JP Morgan believes Suncorp has earnings drivers in the medium term, there is a near-term concern about the insurance cycle, as well as overshooting on margins. Consensus estimates are also looking optimistic to the broker. While personal lines profits have historically been stable, market share losses in home insurance suggest to the broker that there could be some effort to normalise volumes, which could affect margins.
The above was compiled from reports on FNArena, which tabulates the views of eight major Australian and international stock brokers: BA-Merrill Lynch, CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie and UBS.
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