Stockbrokers in Australia are increasingly zooming in on the February reporting season. Expectations are low and opinions differ as to how actual results are likely to impact on share prices, with major indices moving ever so closer to the 5000 level.
The week past saw seven stocks receiving a recommendation upgrade and no less than 22 stocks receiving a downgrade, indicating analysts are increasingly of the view that rising share prices are already reflecting near term growth prospects, if not more.
Upgrades
We’ll go through the list in alphabetical order, Brambles (BXB) first. Analysts at Macquarie have lifted their call on the stock to Buy from Hold on improved earnings certainty, exposure to the US economy and ongoing contract wins. Two days prior, analysts at CIMB downgraded their call to Sell, saying market conditions simply don’t justify the current strength in the share price, although the prospects are admittedly positive. The changes leave the stock in positive sentiment territory in the FNArena Database, with four Buys, two Holds and a Sell.
Energy Resources of Australia (ERA) was bumped up to Buy from Hold by Credit Suisse on valuation grounds after recent share price weakness. The move puts the sentiment read at neutral, with two Buys, two Holds and two Sells. Hills Holdings (HIL) is next on the list after Citi upgraded the stock to Buy from Hold after removing a 25% macroeconomic risk discount that was attached to its valuation. The stock now boasts straight Buys in the database.
Independence Group (IGO) was the only stock to enjoy a double bump, with both Credit Suisse and Deutsche Bank moving to Buy from Hold on the back of a strong December quarter production report. Credit Suisse also upgraded its FY13-14 EPS forecasts by 66% and 18% to reflect the report, while Deutsche expects encouraging exploration during the current quarter. The upgrades push the stock into positive sentiment territory on three Holds and two Buys.
JB Hi-Fi (JBH) received a boost to Hold from Sell from Credit Suisse after a rolling forward of the price target left plenty of room to the upside. Sentiment remains finely balanced at a flat neutral on three Buys, two Holds and three Sells. Virgin Australia (VAH) also got an upgrade to Hold from Sell, this time from Macquarie. The move was made on the back of recent share price weakness, with Macquarie otherwise of the view that the consensus numbers are too high and that the company’s upcoming result may well be a catalyst for a negative share price re-rating. Six Holds and a Buy barely keep the stock in positive sentiment territory.
The last upgrade of the week was enjoyed by Newcrest (NCM), with CIMB shifting to Buy from Hold. While the broker does expect consensus downgrades sooner than later, it feels the bad news is now more than in the price, while also being bullish on gold. Sentiment is positive on four Buys and four Holds and almost 15% upside to the consensus price target.
Downgrades
AMP (AMP) leads off the downgrades following a move from Hold to Sell put though by UBS on the back of a recent run in the share price. The stock remains in positive sentiment territory on three Buys, four Holds and the brand new Sell.
Aristocrat Leisure (ALL) had to wear a double whammy, with Macquarie cutting to Sell from Hold and Credit Suisse moving to Hold from Buy. Macquarie made its call on valuation grounds, while CS cited the recent run in the share price, but notes the expectations that had it at Buy in the first place remain in place. Sentiment took a hit on the downgrades, moving from positive to neutral on two Buys, four Holds and two Sells.
Next on the list is Arrium (ARI), which was dropped to Neutral from Buy on the books of Credit Suisse. The broker is concerned that any gains from iron ore and mining are being undermined by losses from manufacturing, recycling and distribution, while debt management is also an increasing problem. What the broker really wants to see is a cut to dividend payout levels, as it would demonstrate management is at least trying to responsibly manage debt levels. The stock maintains a positive bias in the database on three Buys and three Holds.
Deutsche has lowered Australand Property (ALZ) to Hold from Buy given shares are now trading in-line with the broker’s target. Cochlear was cut to Sell from Hold by Macquarie, pushing the stock even further into negative territory. The broker simply doesn’t think the current earnings outlook justifies the premium at which shares trade. Fantastic Holding (FAN) was also lowered to Sell from Hold, the move made by Credit Suisse on higher costs, lower earnings and a share price that is too high given these issues. Sentiment for Fantastic remains positive on two Buys and a Sell.
FKP Property Group (FKP) is also down to Sell from Hold on BA-Merrill Lynch’s books, the broker concerned about uncertainty surrounding the company’s strategic direction, including the potential de-merger of the retirement business and major asset sales. The downgrade shifts the stock from a neutral to negative sentiment in the database. Merrills also lowered Spark Infrastructure (SKI) to Hold from Buy on an advancing share price and a declining yield. The next downgrade made by the broker last week was Reckon (RKN), which moved to Hold from Buy on concerns about direction post next year’s Intuit licence loss. BA-ML’s last move of the week was a cut to Hold from Buy for TPG Telecom (TPM), the broker making the move because the share price is regarded too high given the lack of any visible near term catalysts. Two Buys, two Holds and a Sell keep the sentiment read in slightly positive territory.
Credit Suisse took the knife to its Harvey Norman (HVN) call, cutting from Hold to Sell on a too high share price, which pushes the stock further into negative sentiment territory. The broker also lowered REA Group (REA) to Hold from Buy given a 28% run in the share price since the first quarter results. Sentiment remains positive on a mix of Buys and Holds. Super Retail Group (SUL) was dumped to Sell from Hold on recent share price strength, although the stock hangs on to its positive skew on two Buys, four Holds and the fresh Sell. The last one from Credit Suisse is Wotif.com (WTF), which is lowered from Buy to Hold, again on share price outperformance. The move leaves the stock further mired in negative sentiment territory.
CIMB dropped Resource Equipment (RQL) to Neutral, the broker citing falling utilisation, a slowdown in awarding new work and cost blow-outs. The stock remains on a positive footing. Meanwhile, Deutsche Bank dropped to Hold from Buy on Myer (MYR) admitting that while the overall business environment is improving, it’s not enough to justify the run shares have been on since September. The move puts the stock at flat neutral sentiment wise, with two Buys, two Sells and four Holds.
UBS dropped Tatts Group (TTS) to Sell from Hold given shares are now trading above valuation. Otherwise, the broker is expecting upcoming first half earnings to be strong. JP Morgan also chimed in with a downgrade on Rex Minerals (RXM) to Sell from Hold after the company put out its maiden resource that showed a 10% decrease in grade. The move pushes the stock deep into negative sentiment territory.
Citi turned a bit sour on Monadelphous (MND), cutting to Sell from Hold given its current big premium to both peers and the market. The broker believes the market must be expecting strong double-digit earnings growth to continue beyond the current year. Citi finds such an outcome highly improbable. The broker also downgraded Navitas (NVT) to Sell from Hold after the 1H result fell short of its expectations on both the sales and earnings lines. The broker does see good signs emerging, but they’re nowhere near enough to justify the current price.
Lastly, Macquarie downgraded K&S Corporation (KSC), Royal Wolf (RWH) and Toll Holdings (TOL) to Hold from Sell. The problem with K&S is a too rich share price. Royal Wolf is sitting too near the broker’s target price despite a solid interim result, while Toll is simply too expensive given the lack of any near-term earnings catalysts. The downgrade sees Toll cross the border into negative sentiment, while the read on K&S is now a flat neutral, and Royal Wolf hangs on to a positive footing on a Buy and a Hold.
There were a few notable target price increases over the course of last week. Challenger Diversified (CDI) saw its consensus price target rocket more than 110% higher after reporting market beating 1H results. Primary Healthcare (PRY) saw its average target rise by more than 15%, also after reporting a strong result last week. On the downside, the consensus target for Pharmaxis (PXS) tumbled more than 25% a week after news an FDA advisory board had put the kybosh on Bronchitol as a treatment for cystic fibrosis.
There were also a number of significant earnings revisions, with forecasts for Challenger Diversified up even more than the price target. Forecasts for Gindalbie Metals (GBG) were lifted by 99% on the recent iron ore price rally. Transurban (TCL) saw its earnings forecasts boosted by 47% after reporting a fairly well received set of financials last week. Conversely, earnings forecasts for Whitehaven Coal (WHC) and Lynas Corp dropped significantly, while iiNet (IIN) and Sedgeman (SDM) were down 21% and earnings forecasts for Iluka came off 15%.
Note: FNArena monitors eight leading stockbrokers on a daily basis and the tables below are based on data analysis from the week past concerning these eight equity market experts. The eight experts in casu are: BA-Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie, CIMB (former RBS) and UBS.
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