The broker wrap: 11 stock buys

Founder of FNArena
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Changes to stockbroker ratings in past week

The past week has been balanced in terms of changes to stock ratings by brokers in the FNArena database. Total Buy ratings now stand at 50.12% following 13 upgrades and 14 downgrades.

Upgrades

Citi upgraded both ANZ Banking Group (ANZ) and Commonwealth Bank (CBA) to Buy due to attractive yields. Price targets were also increased.

Beach Energy (BPT) enjoyed an upgrade to Buy courtesy of BA Merrill Lynch, with recent share price weakness seen to have been excessive, with the market overly pessimistic about the group’s Cooper shale assets. BA-ML also upgraded Brambles (BXB) to Buy as part of a resumption of coverage given the combination of a defensive exposure, balance sheet flexibility and valuation support.

UBS continues to have a bias to leverage over safety with respect to Australian building material stocks and given this the broker has upgraded CSR (CSR) to Buy. The change follows cuts to forecasts and its price target to reflect soft housing numbers and a weak aluminium price.

However, Credit Suisse doesn’t agree leverage is the key attribute for the sector and has downgraded CSR to Sell following its market update. For Credit Suisse, a positive rating doesn’t seem justified given the downside earnings risk in the current environment.

Changes to commodity price forecasts have prompted Credit Suisse to upgrade Evolution Mining (EVN) to Buy. The upgrade is accompanied by adjustments to earnings estimates, but the price target has remained unchanged.

It is a similar story for Western Areas (WSA), with Credit Suisse upgrading it to Buy following changes to commodity price and forex assumptions. Earnings estimates have also been revised, the result being a cut in price target.

As well, Credit Suisse has upgraded Incitec Pivot (IPL) to Buy given potential upside from increased ammonium nitrate capacity, which should be absorbed by the market in coming years.

In contrast, Citi takes the view the earnings downgrade cycle for Incitec Pivot will continue as higher gas prices are increasing costs at the same time as ammonium nitrate volumes are falling. Citi cut its rating to Hold.

With Lend Lease (LLC) securing $2 billion in equity for the Barangaroo project, BA-ML sees far less risk with the project now than had been the case. Some changes to its model have resulted in an increase in price target and BA-ML has upgraded it to Neutral.

Some contract wins by Matrix Composites and Engineering (MCE) caused JP Morgan to lift earnings forecasts and the price target for the stock. With the shares now trading around the broker’s estimate of fair value, the rating has been upgraded to Hold.

Factoring in acquisitions has seen UBS adjust its model for Stockland (SGP), as the deals should boost growth even without an improvement in market conditions. Its rating has been upgraded to Buy.

Downgrades

Tough operating conditions have caused RBS Australia to factor in lower growth assumptions for Ansell (ANN), which pushed down its earnings assumptions, price target, and its rating to Hold.

RBS has similarly downgraded its rating on Ramsay Health Care (RHC) to Sell due to current earnings multiples being seen as unattractive and the stock trading above five-year averages. Changes to forecasts for Iluka (ILU), given lower sales forecasts and a deteriorating operating outlook, have also prompted RBS to downgrade the stock to Neutral.

Credit Suisse has been active in downgrading ratings as well, cutting BHP Billiton (BHP) to Hold as changes to commodity price expectations have impacted earnings assumptions. The price target for the stock went south as well. For a similar reason the broker has downgraded Caltex (CTX) to Hold, while moving to Sell on Sandfire (SFR) and to Hold on Santos (STO).

Domino’s Pizza (DMP) continues to perform solidly and to reflect this Macquarie has lifted its earnings estimates and price target. But at current levels, valuation multiples are less attractive, leading the broker to cut its rating to Neutral.

Ongoing weakness in European markets in particular and potential cuts to pathology fees may weigh on earnings for Sonic Healthcare (SHL) according to RBS, which downgraded it to Hold.

An increasingly competitive environment caused Deutsche Bank to Telecom New Zealand (TEL) to Hold. The change comes after the TelstraClear acquisition by Vodafone, which is seen as evidence of more aggressive action in the market.

Macquarie has cut UGL (UGL) to Neutral with lower earnings forecasts and the price target reflecting a slowing domestic economy and an associated lag in resource related project work.

Changes to earnings forecasts (EF) in cents per share

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

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