A number of first quarter updates from companies had brokers moving this week, with financials and consumer discretionary companies in the spotlight.
In the good books
Credit Suisse has upgraded Harvey Norman (HVN) to Neutral from Underperform, on expectations of an improving outlook for household goods. Earnings estimates have been lifted by 7% to 9%, as the anticipated jump in profitability should reduce the need to support franchisees.
UBS upgraded Resmed (RMD) to Buy from Neutral following a first quarter update, which had most brokers maintaining their Outperform or Buy rating. The company announced a 5% increase in revenue over the past 12 months, to $US357.7 million in the September quarter. UBS is concerned that the growth in sales of flow generators in the US is slowing, but is pleased the company is still managing to lift its gross margins.
CIMB Securities upgraded Whitehaven Coal (WHC) to Outperform from Neutral, following a quarterly production report. The report surprised to the extent that CIMB’s profit projection has now jumped by no less than 83%. Whitehaven is still expected to generate a minor loss.
In the not-so-good books
ANZ (ANZ) announced a massive profit of over $6 billion on Tuesday but most brokers – seven out of the eight majors that FN Arena monitors – left the rating unchanged, with two Underperform, two Neutral ands three Outperform ratings. UBS downgraded the bank to Neutral from Buy. After the bank provided new targets of 4% to 5% revenue growth in FY14, amid cost growth of around 2%. FY16 targets are cost-to-income less than 43% and return on equity greater than 16%. To achieve these targets, UBS believes ANZ will need margin expansion and large growth in cross selling or a reduction in bad debt charges to less than 26 basis points. This is plausible but a big ask, according to the broker.
Credit Suisse downgraded Carsales.com (CRZ) to Underperform from Outperform, following a trading update at the company’s AGM, which pointed to slowing growth in a number of areas. Although the broker thinks there is flexibility in the cost area to help offset a weaker revenue environment, Carsales.com needs to deliver consistently high revenue growth to justify the P/E multiple of 25 times FY14 forecast earnings. Credit Suisse suspects a period of share price underperformance is looming.
CIMB Securities downgraded Suncorp (SUN) to Neutral from Outperform, following an update from the company on potential bushfire losses, which should be around $60-70 million. This is expected to be manageable against the full year allowance. CIMB has downgraded FY14 and FY15 earnings forecasts by 3% and 2% respectively, reflecting more conservative forecasts for bad debts and margin.
The above was compiled from reports on the FNArena database, 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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