In a short week, companies in health care and retail stood out. Pacific Brands was upgraded on expectations of future value and a visit to a sleep conference in the US, put Macquarie at ease with regard to Resmed.
In the good books
Citi upgraded Pacific Brands (PBG) to Buy from Neutral. The company has issued a profit downgrade for FY14 and, based on Citi's revised forecasts, earnings will fall 25%, despite sales growth. The broker believes that, despite the difficult outlook, the core brands will hold value for others and places a 25% probability on a break up of the company. This potential for a break up, which could achieve a valuation of 74c per share, drives the broker's upgrade to Buy from Neutral.
JP Morgan upgraded Resmed (RMD) to Overweight from Neutral. The broker attended the Minneapolis Sleep Conference and was surprised by the issue of bundling, which appears more benign than first thought. Discounting remains rife and this leaves brand, product launches, credit terms and systems capability as the potential drivers of market share, in the broker's view. While discounting is a concern, the reduced risk around bundling will go a long way to destabilising the short interest in the stock.