Buy, Sell, Hold – what the brokers say

Founder of FNArena
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The number of rating changes for individual stocks dropped dramatically in the first week post the February reporting season. Nothing unusual, given the frantic pace of changes in the last two weeks of reporting season and the fact that the share market overall has put in a splendid performance throughout the period.

One extra factor that is going to impact on share market indices this month is the latest round of additions and removals announced by Standard and Poor’s on Friday (see Paul Rickard’s article). Judging by the numerous changes, smaller resources stocks and mining services providers are losing further importance in this market, while industrials remain on the up. Among the many new names that will increasingly appear on funds managers’ radar are recent listings such as Cover-More, Pact Group, Orora and Veda Group. It can be argued those stocks represent the changing nature of the Australian share market.

In the good books

Beach Energy (BPT) was upgraded to Outperform from Neutral by Credit Suisse. The broker notes Beach has leverage to the rising prices for east coast gas, without the exposure to the downside of the export LNG projects. The company, the broker reminds, also has a quality oil business in the Western Flank. The broker has upgraded the target to $1.90 from $1.55, observing that material upside beyond this clearly hinges on the success in unconventional assets.

In the not-so-good books

ResMed (RMD) was downgraded to Neutral from Overweight by JP Morgan.

JP Morgan says the US Centre for Medicare and Medicaid Services has injected uncertainty into the state of reimbursements for sleep apnea equipment after calling for public comment on “bundling” for durable medical equipment (the introduction of bundling to dialysis triggered a 30% reduction in usage of injectables). The broker says the private payer market might also try and moderate resupply through bundling. Hence, while the overall ResMed outlook appears promising, the broker believes the downside risk is large.

Westpac Banking (WBC) was downgraded to Neutral from Buy by BA-Merrill Lynch. The rally in the share price over the past month leaves the stock above Merrills’ target. The key reason for the prior Buy rating was capital strength relative to peers – Commonwealth Bank (CBA), in particular. Now that CBA has decided not to neutralise the dividend reinvestment plan, Merrills observes Westpac’s share price is a beneficiary. Westpac is now at price/earnings parity with CBA and this suggests to the broker there’s limited scope for outperformance.

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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