The broker wrap: 13 stocks upgraded

Founder of FNArena
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Changes to stockbroker ratings in the past week

Recommendation upgrades and downgrades in broker ratings were nearly equally balanced in the week past, with 13 recommendations in the FNArena database lifted compared with 11 cuts. Buy ratings now account for 49.43% of all recommendations. Also the fact that upgrades actually outnumbered downgrades has so far remained the mere exception in 2012.

Upgrades

Among those upgrades were Centro Retail (CRF), with both Macquarie and UBS moving to Buy recommendations on news the company has settled a class action. While the settlement amount was larger than most in the market had forecast, the brokers suggest a more positive view is justified as uncertainty has now been removed.

Downer EDI (DOW) also scored a number of upgrades over the week, Macquarie, JPMorgan and Deutsche Bank all moving to Buy and Credit Suisse to a Neutral recommendation. The upgrades follow an update by the company that saw full-year earnings guidance reiterated and brokers take greater confidence that a turnaround remains on track. Improved value following recent share price weakness was another factor supporting some of the upgrades.

Also in mining services, Monadelphous (MND) enjoyed an upgrade to Outperform by Macquarie. This was given due to some increases to earnings estimates pushing up the broker’s price target as well as a change in analyst covering the stock.

Despite announcing further write-downs on some problem contracts over the past week, Leighton Holdings (LEI) has been upgraded to Neutral by Deutsche Bank. The call is largely valuation-driven following recent share price weakness and Deutsche acknowledged there remains some downside risk to earnings relative to full-year expectations.

An upgrade for Mount Gibson (MGX) to a Neutral by Macquarie is equally the result of recent share price weakness, which has the stock trading in line with the broker’s price target. Similarly Macquarie has upgraded Qube Logistics (QUB) to Neutral after recent share price falls.

A change in analyst has resulted in JPMorgan upgrading Spark Infrastructure (SKI) to Neutral as changes to its model see the broker lift its price target for the stock. Share price moves are behind BA-Merrill Lynch’s upgrade on Tabcorp (TAH) to Neutral, while Macquarie has upgraded Wotif.com (WTF) to a Buy following a share price fall of about 15% in recent weeks.

Downgrades

Among the downgrades was Aristocrat Leisure (ALL), RBS Australia moving to a Neutral. RBS says the earnings outlook continues to improve, but a gain in the share price of about 50% since last September means this is now priced into the stock.

Shares price performance is also the driver for UBS’s downgrade of Australian Pharmaceutical Industries (API) to a Sell, while Credit Suisse has for a similar reason downgraded Dexus Property (DXS) to Neutral.

Citi notes Caltex (CTX) has endured a slow start to 2012 and has cut its earnings estimates and price target accordingly. An exit from refining operations would result in minimal value creation in Citi’s view and given this and the changes to its model, the broker has moved it to a Sell rating.

Recent share price strength leaves Discovery Metals (DML) priced for perfection in Citi’s view and as a result the broker has downgraded it to a Sell. Supporting the move is a reduction in earnings estimates and price target given changes to Citi’s cost and capex assumptions.

RBS had been hoping for a better second half performance from Engenco (EGN) than is now considered likely and so while the group’s turnaround continues, the broker suggests some patience is required by investors. To reflect this, the rating is downgraded to Neutral.

Higher expenditure expectations have resulted in UBS cutting earnings forecasts for Ivanhoe Australia (IVA). Add in an increased risk of project development delays and UBS sees limited short-term upside, downgrading to a Neutral rating.

While News Corporation (NWS) delivered a better than expected third-quarter result, there was no lift in its full year guidance, which implies a tougher final quarter of the year. RBS sees value at current levels, but the UK phone hacking issue is expected to overhang the share price, so the broker has downgraded it to Neutral.

RBS has downgraded Seek (SEK) to Hold on recent share price performance, a move supported by ongoing weak advertising conditions. Meanwhile, JPMorgan has downgraded SP Ausnet (SPN) to underweight on a less attractive valuation relative to the sector. UBS sees a fair valuation for Ten Network (TEN) at current levels, so the broker has moved to a Neutral rating.

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

Changes to earnings forecasts (EF) in cents per share

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. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.

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