Stockbroker upgrades and downgrades are pretty much in balance during this quiet period. The past week saw a general re-assessment of David Jones (see our mid-week broker update here), which led to no less than three brokers upgrading their rating to Neutral for the stock. This has pushed the face value numbers in favour of more upgrades. As such, FNArena recorded 11 upgrades and 8 downgrades.
All in all, changes in stockbroker ratings seem devoid of any strong themes. Most are simple responses to profit warnings or to re-appraisals, as share prices rise on low volumes.
In the good books
Commonwealth Bank (CBA) was upgraded to Overweight from Neutral by JP Morgan. CBA’s quarterly earnings beat the broker on lower provisioning expense and the result was compositionally solid, the broker suggests. Margins declined slightly but FUM growth was strong. Business loan growth was absent but mortgage growth was above system for the first time in three years. Importantly, CBA was able to generate capital in a low earnings growth environment, leading the broker to increase its dividend forecast. With peers going ex-div, CBA is well positioned for upside, the broker suggests.
Tatts Group (TTS) was upgraded to Neutral from Underweight by JP Morgan. The broker is upgrading to Neutral from Underweight because the stock has underperformed this year. The recent trading update suggests lotteries are doing well and the investment in the brand and marketing and wagering technology should deliver benefits. Forecasts for FY14 have been increased and the target price is raised to $2.95 from $2.80.
In the not so good books
Ausdrill (ASL) was downgraded to Neutral from Overweight by JP Morgan. JP Morgan has downgraded the rating to Neutral from Overweight. The price target is reduced to 97c from $2.28. The broker considers the company’s strong link to mine production increases is broken. Ausdrill is required to make major changes to reset earnings and reduce gearing. After a trading halt, the company has provided initial quantitative guidance and now expects normalised profit to be down 60% in FY14. Management has stated the weakness is widespread, including its core drilling and blasting services in Australia and Africa. JP Morgan suspects the need to lower gearing will make the process of rebuilding challenging.
UBS downgraded Harvey Norman (HVN) to Neutral from Buy. First quarter sales were up 2.7% and in line with the broker’s expectations. Franchisees slowed, as did like-for-like sales in New Zealand. This confirms the challenging environment is still in place. The broker has lowered first half profit forecasts by 10.2% and FY14 by 7%. The stock has outperformed over the quarter and is now trading in line with the broker’s price target (lowered to $3.20 from $3.30) so the rating is downgraded to Neutral from Buy.
Orica (ORI) was downgraded to Neutral from Overweight by JP Morgan. Volume growth is softening but what has caught JP Morgan by surprise is the impact of the shift in the mix towards lower margin regions. This has resulted in reduced profit per tonne for mining services. The broker thinks consensus earnings estimates for FY14 are optimistic and the fundamental valuation is no longer supportive. FY13, FY14 and FY15 earnings forecasts have been downgraded by 0.2%, 6.2% and 4.7% respectively. The rating is downgraded to Neutral from Overweight and the price target remains at $21.20.
Deutsche Bank downgraded Macquarie Group (MQG) to Hold from Buy. Deutsche Bank thinks that while earnings growth and returns will increase significantly over the medium term, the share price will take a breather. The first half showed strong growth in all franchises with both annuity and market-leveraged business contributing. The next upside leg is seen in FY15 and the valuation is looking full on FY14 earnings expectations, amidst the potential for negative sentiment around the tapering of QE in the US. The broker does stress that this is a valuation and timing call rather than revealing concerns around the business model and growth. The rating is downgraded to Hold from Buy and the price target is steady at $56.20.
Westpac Banking Corp (WBC) was downgraded to Hold from Buy by Deutsche Bank. The FY13 result was solid but Deutsche Bank, looking into FY14, finds it difficult to envisage the bank delivering top growth among peers. Initiatives are likely to take some time to show. Further special dividends are expected, but valuation now looks challenging following a 26% increase in the share price since June. Hence, the rating is downgraded to Hold from Buy. The target price is raised to $35.90 from $34.80.
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.
Also in the Switzer Super Report:
- Peter Switzer: Could a correction be KO’d by a market melt-up?
- Elan Miller: Digging for value with Drillsearch (DLS)
- James Dunn: Which Banks are still a buy?
- Penny Pryor: Record weekend as auction market reaches boiling point
