Buy, Sell, Hold – what the brokers say

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In a short week, companies in health care and retail stood out. Pacific Brands was upgraded on expectations of future value and a visit to a sleep conference in the US, put Macquarie at ease with regard to Resmed.

In the good books

Citi upgraded Pacific Brands (PBG) to Buy from Neutral. The company has issued a profit downgrade for FY14 and, based on Citi’s revised forecasts, earnings will fall 25%, despite sales growth. The broker believes that, despite the difficult outlook, the core brands will hold value for others and places a 25% probability on a break up of the company. This potential for a break up, which could achieve a valuation of 74c per share, drives the broker’s upgrade to Buy from Neutral.

JP Morgan upgraded Resmed (RMD) to Overweight from Neutral. The broker attended the Minneapolis Sleep Conference and was surprised by the issue of bundling, which appears more benign than first thought. Discounting remains rife and this leaves brand, product launches, credit terms and systems capability as the potential drivers of market share, in the broker’s view. While discounting is a concern, the reduced risk around bundling will go a long way to destabilising the short interest in the stock.

In the not-so-good books

Macquarie downgraded AGL Energy (AGK) to Neutral from Outperform. Warmer than usual weather is dampening the outlook. Macquarie notes AGL relies on one month of winter and a cooler autumn to lift gas demand and electricity usage. Macquarie has also deferred timing of both the Diamantina power station and QCLNG gas demand in refining the outlook for the company. The broker thinks there is some premium attached to a potential MacGen acquisition and upside for investors centres on realisation of the 50% interest in ATP1103. Still, the risk of softness in electricity prices and reduced profitability in base load generation contributes to a lowering of the recommendation.

Macquarie downgraded Ramsay Health Care (RHC) to Neutral from Outperform. Macquarie has updated forecasts to include the acquisition of Generale de Sante. The acquisition increases Ramsay’s presence in France to 113 hospitals from 38. The broker is confident in Ramsay’s ability to deliver, but the French market is challenging and the ramping up of a presence in France will be a material headwind to growth.

Credit Suisse downgraded The Reject Shop (TRS) to Underperform from Neutral. The company has downgraded FY14 profit expectations by 15%, reflecting a downturn in sales at the end of May and beginning of June. Credit Suisse suspects the weakness in trading was felt across the industry and, as such, represents downside risk to other retailers. With a new CEO yet to be appointed and the product offering under review, the broker remains cautious on long-term sales growth assumptions.

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.

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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