The broker wrap: five buys vs. six sells

Founder of FNArena
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Changes to stockbroker ratings in the past week

With the local profit-reporting season now well under way, brokers have responded by making significantly more downgrades to ratings than upgrades over the past week. Only five stocks enjoyed upgrades compared with 18 downgrades. Total Buy recommendations now stand at 49.52%.

Upgrades

Among the upgrades was a Buy rating for Acrux Limited (ACR) from RBS Australia. Recent share price weakness has improved the value on offer, which has been more than enough to offset cuts to earnings forecasts and price target on revised market share assumptions.

A review of expectations for building materials stocks has seen JP Morgan adjust its earnings and price targets for Fletcher Building (FBU). Allowing for the changes the broker still sees solid upside potential from current levels and so upgraded it to Buy.

ResMed (RMD) delivered good fourth quarter results this week and BA-Merrill Lynch expects the positive momentum evident in the period to continue into the first half of 2013. Increases to earnings estimates and price target have supported an upgrade to Buy.

Shares in SP Ausnet (SPN) have weakened of late and UBS suggests the falls have likely been in response to concerns with respect to potential claims stemming from bushfires in Victoria in 2009. Given insurance cover appears adequate, the share price weakness is overdone according to UBS, so the rating is upgraded to Buy.

Valuation is the drive of Deutsche Bank’s upgrade of Westfield Group (WDC) to Buy following a review of the A-REIT sector. Changes to forecasts have driven an increase in price target for Westfield, which improves the upside on offer in Deutsche’s view.

Downgrades

Deutsche was also active in downgrading ratings for A-REIT stocks, cutting recommendations on Dexus (DXS), Charter Hall Group (CHC), Commonwealth Property Office (CPA), GPT (GPT) and Investa Office (IOF).

Deutsche has moved to a Sell rating in each case with the exception of Charter Hall, which was downgraded to Hold. Valuation has been a driver of the downgrades as each stock now appears relatively expensive following gains for the sector in general.

Among the other downgrades in ratings, Tabcorp (TAH) experienced the most. BA-ML, UBS, Macquarie and Credit Suisse all cut their ratings, the former to Sell and the others to Neutral. While full-year earnings were as expected, there is increased earnings risk for Tabcorp in coming years and brokers see this as limiting any potential outperformance.

Telstra (TLS) was also downgraded by Credit Suisse to Neutral following an in-line earnings result. The broker suggests the market is now pricing in all potential valuation upside. This is reflected in the share price trading near Credit Suisse’s price target.

Stockland (SGP) met expectations with respect to full-year earnings, but disappointed on guidance for the coming year, enough for both UBS and Credit Suisse to cut it to Neutral. The downgrades reflect the view a tough year in 2013 will limit scope for share price outperformance.

JP Morgan has adjusted earnings forecasts across the building materials sector, the changes for Boral (BLD) resulting in a cut in price target. The share price of Boral has rebounded following a recent profit warning and with less value on offer the broker downgrades to Neutral.

Cochlear (COH) has also been downgraded by JP Morgan to Sell after what the broker viewed as an uninspiring full-year profit result that showed evidence of slowing growth.

Credit Corp Group (CCP) saw its rating cut by JP Morgan to Neutral following the release of full-year earnings. The result met previous guidance, but was below consensus and the broker sees limited scope for outperformance with the stock now trading close to its valuation.

For UBS, a solid profit result from Challenger Diversified (CDI) was not enough to prevent a downgrade to Hold. The stock continues to offer an attractive yield, but recent share price strength limits the value on offer.

Some uncertainty stemming from ongoing regulatory red tape has prompted RBS Australia to downgrade Tissue Therapies (TIS) to Hold, as an expected approval is now going to be pushed back.

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.

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 consider the appropriateness of the information in regards to their circumstances.

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