Buy, Sell, Hold – what the brokers say

Founder of FNArena
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Domestic stockbrokers accelerated the pace of ratings upgrades and downgrades for individually-listed stocks in the week ending Friday.

Adjustments are a combination of weak stocks becoming too cheap to maintain a negative rating, strong companies proving they still have enough oomph in them, and earnings beats that force analysts to review their previous stance. Things don’t exactly get any easier with plenty of stocks receiving both upgrades and downgrades post the release of financial results.

In the good books

AMP (AMP) was upgraded to Buy from Neutral by Citi and to Neutral from Sell by UBS. Citi thinks net flows in wealth management were relatively healthy in the first half and this should position AMP for a turn in sentiment and continues to forecast 20% growth in FY14 underlying profit. AMP’s 2013 result held few surprises but UBS suspects that, while structural and cyclical challenges persist, the worst is over and the earnings risks are now manageable.
See also AMP downgrade.

Brambles (BXB) was upgraded to Outperform from Neutral by Credit Suisse and to Buy from Hold by Deutsche Bank. Impressive margin growth in a weak-volume market convincing the Credit Suisse team that Brambles’ stars are aligning. The broker believes the $100 million cost-out opportunity identified last year could now be closer than anticipated and points out that organic growth was showing signs of improvement. Brambles’ result beat Deutsche Bank and on the strength of an improving earnings outlook, and the beginnings of a long awaited cost reduction program, the broker has upgraded.

Fairfax Media (FXJ) was upgraded to Buy from Underperform by BA-Merrill Lynch and to Neutral from Underperform by Credit Suisse. The first half revealed better-than-expected cost outcomes. Merrills thinks FY15 should produce incremental savings of $60 million as metro print facilities are exited and production is accommodated within existing lower-cost capacity at regional facilities. Underlying earnings stabilised in the first half and Credit Suisse found plenty of positive aspects. The company has raised cost reduction targets and Domain revenue growth is strong. Credit Suisse thinks the investment story is improving, with the core business stabilising, the dividend being raised and $80 million in net cash on the balance sheet. The broker thinks an IPO of Domain would be a significant catalyst. See also Fairfax downgrade.

Qantas (QAN) was upgraded to Outperform from Neutral by Macquarie. Qantas will announce its strategic review on February 27. The broker expects specific details on costs and thinks Qantas can save at least $2 billion over three years. Ahead of the review, coverage has transferred to a different analyst and the rating is upgraded to Outperform from Neutral. The broker thinks the time to buy airlines is when things look their worst and this means, for Qantas, now is the time.

SEEK (SEK) was upgraded to Neutral from Underperform by BA-Merrill Lynch and to Neutral from Sell by Citi. SEEK romped home with its interim net profit, outpacing Merrills by 16%, thanks to lower finance costs, a 17% tax rate and a stellar performance from learning (up 88%) and Brazil (up 49%). For the broker, the main news was the acquisition of JobStreet’s online business, believing this will allow SEEK to “seek” its glory in Asia and establish clear leadership in Hong Kong, Singapore and most of South-East Asia.

Suncorp (SUN) was upgraded to Neutral from Underperform by Credit Suisse. Suncorp’s interim results fell short of consensus and the broker’s estimates, the bank and the life business disappointing after copping a bad debt charge and posting higher-than-expected operating expenses. The broker believes earnings have now been re-based, reducing downside risk, and upgrades the stock to Neutral from Underperform.

Westfield Group (WDC) was upgraded to Outperform from Neutral by Credit Suisse. The broker expects the company will redeploy capital from asset sales into a buyback, given the stock is trading at an 11.3% discount to net asset value. Headwinds remain – notably speculation of $1 billion of UK asset sale – but the broker says daylight is breaking.

In the not-so-good books

AMP (AMP) downgraded to Underperform from Neutral by Macquarie. In the wake of the 2013 result, Macquarie suspects that the market is underestimating the risk of further earnings volatility in wealth protection. The broker thinks, while AMP is fixing the business, there are structural issues beyond the company’s control. The outlook for claims and lapse trends remains highly uncertain.

Fairfax Media (FXJ) was downgraded to Neutral from Outperform by Macquarie and to Neutral from Buy by UBS. Macquarie observes the first half showed the first period of earnings growth at the EBITDA level since 2010 and demonstrates a shift in momentum. As key parts of the business stabilise, the broker notes investors are moving the focus to the outlook and valuation of Domain. The rating is downgraded to Neutral from Outperform. Fairfax’s interim beat UBS by 17%, the company delivering its first period of earnings growth since the first half of FY11. The overshot reflected improved operational expenditure and interest costs thanks to a $10 million windfall on interest rate swaps. Revenue fell 7.4% year on year, marginally disappointing. See also Fairfax upgrade.

iiNet (IIN) was downgraded to Underperform from Buy by BA-Merrill Lynch and to Reduce from Hold by CIMB Securities. The broker is downgrading the stock to Underperform from Buy. Merrills considers the company is coming to the end of its acquisition-led growth strategy with a transition to slower organic growth. The competitive environment is increasingly intense and the broker expects margin compression from the NBN roll out. A period of rapid growth has come to an end, in CIMB’s view. Core operations are falling into low growth mode while NBN-related growth won’t announce itself until 2016.

Pacific Brands (PBG) was downgraded to Neutral from Buy by Citi, to Underperform from Neutral by Credit Suisse and to Neutral from Buy by UBS. Pacific Brands reported an earnings decline of 14% in the half but sales growth was encouraging. The problem is weakness in work wear will likely mean a similar decline in the second half and this segment could become an issue for management in the next few years. Credit Suisse suspects, with headwinds set to continue, that stabilising earnings is looking more like an FY16 proposition. The broker is happy with the strategy on Bonds and Sheridan but thinks the outlook for work wear is more uncertain. UBS says Pacific Brands’ headline sales were very strong but came at a price, the return for every dollar spent in sales and marketing returning just a dollar in incremental revenues.

Sirtex Medical (SRX) was downgraded to Neutral from Buy by UBS and to Neutral from Outperform by Macquarie. Sirtex’s interim missed the mark as higher costs hacked into an otherwise solid result. UBS downgrades FY14/15 earnings per share forecasts 9.6% and 7.3% to account for higher cost assumptions but says overall, the result augurs well for growth, particularly given the potential upside to be derived from the SIRFLOX Study results. Sirtex posted a small miss against Macquarie’s forecast due to higher than expected marketing spend. The result was otherwise solid, with recruitment for trials continuing rapidly, geographical spread growing and further opportunities being investigated.

The FNArena database 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.

Important: 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. Consider the appropriateness of the information in regards to your circumstances.

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