Buy, Sell, Hold – what the brokers say

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Financial services – mainly insurers – featured on the downside of brokers’ ledgers in the early part of the week, while miners and energy companies are in the good books for a change.

In the good books

BA-Merrill Lynch upgraded Atlas Iron (AGO to Neutral from Underperform as weak results have now been laid bare and iron ore prices have stabilised, limiting near-term downside.

JP Morgan upgraded Drillsearch Energy (DLS) to Neutral from Underweight based on the improved sector-relative valuation as the stock retreats from its April highs. The target is raised to $1.60 from $1.56 and JP Morgan increases FY15 earnings forecasts by 8%. The quarterly result beat on revenue, capex and cash flow. Further improvements will depend on the longer-term outlook and the broker awaits the investor briefing on August 1.

In the not-so-good books

BA-Merrill Lynch downgraded Bendigo and Adelaide Bank (BEN) to Neutral from Buy. The bank is fundamentally attractive and better positioned from a regulatory perspective compared with the majors but its recent performance is reflected in the share price. The stock is up 14% since April while the sector is up 3%. The broker acknowledges a key risk in relation to the Great Southern class action has now been removed, as an agreement has been concluded with investors.

Macquarie downgraded Insurance Australia Group (IAG) to Neutral from Outperform following a pre-announcement of an insurance margin well ahead of guidance. But notwithstanding synergies from the incorporation of the Wesfarmers’ business, the rate of premium growth is slowing and IAG’s share price is currently reflecting a favourable claims environment. Having pre-released its result “surprise”, there’ll be no more surprises at the actual result release.

Credit Suisse downgraded Nufarm (NUF) to Neutral from Outperform. A month ago, the broker was confident in its Outperform rating for Nufarm, driven by growth in Brazil. But in the interim, soft commodity prices have fallen in the region and may yet fall further, pressuring farmers to turn to cheaper pesticides, the broker suggests.

Credit Suisse downgraded QBE Insurance Group (QBE) to Neutral from Outperform and Macquarie cut from Neutral to Underperform, following a profit warning that lowered first half guidance to 22% below Macquarie’s forecast. While the balance sheet continues to improve – funded by a lack of dividends in Credit Suisse’s opinion – reserving issues continue to hold back recovery.

The above was compiled from reports on FNArena, which tabulates the views of eight major Australian and international stock brokers: BA-Merrill Lynch, CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie and UBS.

Important: 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. Consider the appropriateness of the information in regards to your circumstances.

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