Buy, Sell, Hold – what the brokers say

Founder of FNArena
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On the negative side of ratings, of which there are many, we find a whole slew of iron ore exposed stocks, alongside department store owner and perennial market disappointer, Myer. The latter stuck to a long-lasting legacy and disappointed yet again with its financial market update. The event was good for no less than four downgrades in rating.

In the good books

BC Iron (BCI) was upgraded to Neutral from Sell by Citi after the recent fall in the share price. If the Iron Ore Holdings (IOH) deal fell over, the broker would consider this as a positive, as the company does not appear to generate enough cash to fund the Buckland project on Citi’s iron ore price forecasts.

Newcrest (NCM) was upgraded to Buy from Neutral by BA-Merrill Lynch. The broker is upgrading to Buy from Neutral, taking into account the company’s potential to weather falls in the gold price. Merrills believes the market can envisage production upside from Cadia but is not willing to give the company credit for potential improvements.

In the not so good books

Arrium (ARI) was downgraded to Underperform from Neutral by Macquarie. The broker notes 2014 iron ore supply from the world’s top five producers looks set to be 86mt more than forecast, and the impact of low cost supply growth is occurring sooner and more significantly than the broker previously assumed. The broker has subsequently cut its forecast 2014-19 prices by 5-20%. The broker has cut Arrium’s forecast earnings by around 60% in FY15-16 as a result, noting a lot will have to go right if the business is to be turned around.

BC Iron (BCI) was downgraded to Neutral from Outperform by Macquarie. The impact on mid-cap miners as a result of Macquarie’s cuts in forecasts for iron ore is 50-100% forecast earnings cuts across the coverage universe. Balance sheets now become critical. See also BCI upgrade.

Goodman Group (GMG) was downgraded to Underweight from Neutral by JP Morgan. Last month, the broker downgraded Goodman to Neutral from Overweight as it was trading close to target, and now the broker has gone a step further and downgraded to Underweight as the share price has reached the target. It is simply a valuation call, given the broker believes GMG will exceed its 6% FY15 earnings growth guidance and comfortably achieve its 6%pa through-the-cycle growth goal.

Iron Ore Holdings (IOH) downgraded to Neutral from Outperform by Macquarie. Another victim of Macquarie’s iron ore forecast cuts, which are impacting mid-cap miners the most.

Myer (MYR) was downgraded to Hold from Add by CIMB Securities, to Sell from Neutral by Citi, to Underweight from Neutral by JP Morgan and to Sell from Neutral by UBS. FY14 earnings were below CIMB’s expectations. A number of years of unsustainable cost cutting and deferrals has led the company to finally acknowledge the level of underinvestment. Now this is factored in, the biggest risks is the profit margin in FY15 and CIMB suspects the company will still find it hard to pass on higher costs. The sharp fall in second half FY14 gross margins suggests to Citi a poor run rate leading into FY15. Myer’s result missed JP Morgan’s foreacst, with lower gross margins the major culprit. Myer is doing all the right things, UBS suggests, yet it is simply struggling and having to spend more and more money just to stand still. The broker has cut forecast earnings by 22% and 15% in FY15-16 and downgraded to Sell.

Sundance Resources (SDL) was downgraded to Neutral from Outperform by Macquarie as the broker downgraded forecasts on the back of the plummeting iron ore price.

Earnings Forecast

FNArena 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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