The broker wrap: poor week for ‘buy’ ratings

Founder of FNArena
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Out of 14 changes to ratings from brokers in the FNArena database over the past week, only three were upgrades. Two of the three stocks upgraded were also downgraded by brokers elsewhere in the market. Total Buy recommendations now stand at 51.30%.

Changes to stockbroker ratings in the past week:

Upgrades

Among the upgrades was Aurora Oil and Gas (AUT), where JP Morgan has moved to a Neutral rating. The upgrade reflects the broker factoring in lower risk assumptions for enhanced recoveries from the group’s shale assets and an associated increase in valuation and price target.

On the other hand, UBS and Credit Suisse downgraded the stock to Neutral ratings from Buy previously. The change in both cases is a valuation call as Aurora’s share price has risen more than 30% over the past two months.

News of a capital raising from Bank of Queensland (BOQ) has been followed by Deutsche Bank upgrading the stock to Buy. In Deutsche’s view, new management has cleared the decks with respect to bad debts and moved to address balance sheet issues, so the stock offers value at current levels.

Again, this is not a universal view as Macquarie has reacted to news of the raising by downgrading the bank to Sell. Macquarie continues to see a challenge for the regional lender in earning its cost of equity going forward, so the current premium to peers implies limited value in the broker’s view.

The final upgrade during the week was Macquarie moving to a Buy on Tabcorp (TAH). The lift in rating is another valuation call, as recent share price weakness has the stock trading below the broker’s valuation estimate.

Downgrades

Among the downgraded was Nufarm (NUF), with both Macquarie and BA Merrill Lynch lowering ratings to Neutral. A mixed interim result was enough for Macquarie to pull back earnings estimates and its price target. BA-ML’s downgrade was a valuation call as the broker sees limited upside in the stock at current levels.

Forge Group (FGE) has also suffered a downgrade to Neutral from Citi. Forge shares have risen almost 40% year-to-date, which limits the valuation appeal in the broker’s view. This is despite a new contract causing Citi to lift its earnings estimates and price target.

Having previously rated Leighton Holdings (LEI) as Outperform, Macquarie has shifted to an Underperform rating post a further write-down on problem contracts as part of yet another profit warning from management.

As with Leighton, Stockland (SGP) has also lowered earnings guidance and the market has reacted by adjusting earnings forecasts and price targets. For BA-ML this is enough to justify a downgrade to Neutral, especially given few obvious catalysts to drive the share price in the shorter-term.

While Oroton (ORL) delivered a good profit result, Credit Suisse has downgraded it to Neutral. The price target has been increased and good earnings growth should continue, but the broker simply sees less upside following recent share price gains.

Changes to earnings forecasts (EF) per share in the past week:

Note: FNArena monitors eight leading stockbrokers on a daily basis. The eight experts are: BA-Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, RBS and UBS.

Important information: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. 

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