Buy, Sell, Hold – what the brokers say

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As brokers head into the blackout period for the February reporting season, activity was light on the ground. But of the actions that did occur, most were positive as analysts continued to find value. Early reporters – like JB Hi-Fi – were also rewarded with upgrades.

In the good books

BA Merrill-Lynch upgraded Challenger (CGF) to Neutral from Underperform.

The broker believes Challenger offers a unique value proposition in a market that could grow significantly in coming years, controlling 55% of annuities and attracting almost all new flows. Given CGF’s structure, margin improvement and solid funds management performance, the broker can no longer justify an Underperform rating.

Macquarie upgraded Carsales.com (CRZ) to Outperform from Neutral after reviewing the investment thesis on carsales.com and finding the stock worthy of an upgrade, following the recent sell off. The broker expects top-line growth momentum will slow in the months ahead, but the company remains in a good position. Macquarie has reduced assumptions for dealer revenue in FY14 to growth of 11% from growth of 16%. Display revenue growth expectations have also been ratcheted down.

JB Hi-Fi (JBH) was upgraded to Neutral from Underperform by BA-Merrill Lynch and to Overweight from Neutral by JP Morgan following a solid result.

JB Home is performing ahead of BA-Merrill Lynch’s expectations and with a more favourable outlook than peers, JBH deserves better than the broker’s conservative earnings forecasts. BA-Merrill Lynch still has concerns around a retail slowdown throughout 2014 and the potential impact of a lower dollar, which means the stock stays at Neutral, rather than being moved up a further notch to Buy.

JP Morgan is becoming more confident in the sales outlook for the second half. JB Hi-Fi had preannounced its result so the positive surprise lay in the full year guidance, up 8-11% on the range. Earnings margins are proving resilient with JB Home a source of growth and JBH is better positioned than other small cap peers, who will suffer more later in the year from a lower Australian dollar, according to JP Morgan.

BA-Merrill Lynch upgraded Macquarie (MQG) to Buy from Neutral (see Fundie’s Favourite). Merrills believes Macquarie’s day has finally come after years of wallowing in capital market inactivity. With developed economies expected to cycle upward and the Australian dollar on the slide, the broker notes MQG is set to benefit, while financial strength provides room for accretive acquisitions and/or capital management. MQG may have seen solid PE expansion of late but has posted the earnings to back this up.

In the not-so-good books

Credit Suisse downgraded Myer (MYR) to Neutral from Outperform. Were Myer to merge with David Jones (DJS), Myer shareholders would be the losers and DJs’ shareholders the winners, according to Credit Suisse, which described MYR’s synergy suggestion as “sleight of hand”. Even if the two could increase scale as one, the time and cost required to bed down the merger would be an offset anyway. Better just to get their acts together individually.

JP Morgan downgraded Lynas Corporation (LYC) to Neutral from Overweight following a quarterly report for the three months to December that failed to impress. There are still issues with the Lynas Advanced Materials Plant (LAMP), which have delayed the achievement of phase 1 capacity. JP Morgan is disappointed and believes the catalysts for an upgrade are also delayed. It may be one of the cheapest stocks under coverage but, until the company can demonstrate the plant is operating at capacity, JP Morgan thinks the market will not be positive on the stock.

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.

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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