Halloween feature: 5 scary stocks

Financial journalist and commentator on 3AW and Sky Business
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With Halloween around the corner, it’s worth looking at some of the scarier stocks on the market – where valuations look too juicy. A 20% price drop would be a truly alarming sight at your doorstep: here are five stocks where the analysts’ consensus sees such a fall as a distinct possibility.

CIMIC Group (CIM, $47.76)

Market capitalisation: $15.5 billion

Analysts’ consensus price target: $38.47

Implied downside –19.4%


Source: ASX

The former Leighton Holdings – majority-owned (through Hochtief) by Spanish construction group ACS – has had a great 12 months, with its stock surging from just over $28 a year ago to $48.19.

Arguably, it’s had too good a year.

The construction and engineering contractor reported a 22% rise in half-year net profit, and said a swelling cash pile was helping to underpin a significant expansion of its shareholder returns. The company, which boosted its business by gobbling up engineering services company UGL and mineral processing company Sedgman in 2016, maintained its net profit guidance for FY17 (CIMIC uses the calendar year as its financial year) at $640 million–$700 million –  which would represent a lift of 10.3%–20.7%. CIMIC had $35.2 billion worth of work in hand at the end of June: it has subsequently lifted that to more than $40 billion, equivalent to more than two years’ revenue.

But while there is nothing wrong with CIMIC’s outlook, the stock is a victim of its own success – at $47.71, CIM is priced at 22.8 times expected FY17 earnings and 20.4 times expected FY18 earnings. The analysts’ consensus target price sees it at $38.47 (Thomson Reuters) and $38.32 (FN Arena) – either way, an alarming gap.

WiseTech Global (WTC, $11.31)

Market capitalisation: $3.3 billion

Analysts’ consensus price target: $8.00

Implied downside: –29.3%


Source: ASX

Logistics software company WiseTech Global has been a spectacular performer since listing on the ASX in April 2016. Little known outside the logistics industry – where its cloud-based CargoWise software platform is a world-leading product – the stock was sold in its initial public offering (IPO) at $3.35 a share, debuted on the market at $3.45, and subsequently cruised to $11.47 earlier this month, making founder Richard White a billionaire.

In FY 2017 Wisetech reported a revenue rise of 50%, to $153.8 million, and a net profit of $32 million – more than 14 times what it earned in FY16. Recurring revenue was 99% of the total. The company announced seven acquisitions, in Germany, Italy, Taiwan, Australasia and Brazil. WiseTech gave guidance for FY18 of revenue growth in the order of 30%–37%, to $200 million–$210 million, and earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 32%–39%, to $71 million–$75 million.

The market loved it – but arguably, too much. Although analysts believe that strong earnings growth will flow through – with earnings per share (EPS) expected to rise about 40% in FY18 and by about 35% in FY19 – the price being paid for those earnings looks too high. WTC trades at 74.4 times expected FY18 earnings and 55.2 times expected FY19 earnings.

WiseTech is one of the ASX’s few globally significant technology companies, which explains much of the investor support, but anyone buying the stock now would have to be aware that it has run very hard, and looks in need of a breather. On analysts’ consensus price target – which Thomson Reuters has at $8, while FN Arena’s collation is even more bearish, at $7.12 – this is a stock with a nose-bleed.

Fisher & Paykel Healthcare (FPH, $11.92)

Market capitalisation: $6.8 billion

Analysts’ consensus price target: $8.21

Implied downside –31.1%


Source: ASX

New Zealand-based mask and breathing device producer Fisher & Paykel Healthcare Corporation operates in the same market as Australia’s ResMed – in fact the two are bitter rivals, as shown by a recent court battle in which the former argued that the New Zealand firm’s masks, designed to treat sleep apnoea, violated its patented technology –  a response to litigation that F&P Healthcare launched. ResMed won the most recent round, in the German courts, but the intellectual property dispute is far from over.

The ongoing stoush has not harmed the FPH share price, which has moved from $1.92 five years ago to $11.93, but the $6.8 billion company – New Zealand’s largest – has started to stretch its valuation beyond where analysts are comfortable.

FPH is an impressive performer, selling its products and systems in more than 120 countries, in growing markets; but at $11.93, it is trading on almost 40 times expected FY18 earnings, and 34 times projected FY19 earnings. That’s too high for the market’s liking: Thomson Reuters posts an analysts’ consensus price target of $8.21 on the stock, which if borne out, would see FPH correct by 31%.

 A2 Milk (A2M, $7.67)

Market capitalisation: $5.6 billion

Analysts’ consensus price target: $5.87

Implied downside: –23.4%


Source: ASX

For most investors, A2 Milk will be the stock that got away. The New Zealand-based infant formula producer came on to the ASX at 56 cents in March 2015 (it was already listed in NZ) amid very little publicity, but the shares have since made a mockery of such humble beginnings, surging to $7.89.

A2 has the ‘wellness’ story behind it: its milk products contain a2 proteins only, compared to normal milk which have both a1 and a2 proteins. a2 milk is thought to be easier to digest, and subsequently, to give better wellbeing. But it is the demand for infant formula – “powdered gold” – that has really turbo-charged the share price. In FY17, A2’s sales into China jumped from $38.2 million to $88.9 million, powering a rise in EBITDA from $9.2 million to $32.7 million.

The company has won CFDA (China Food & Drug Administration) approval to continue selling its products in the market from January 1, 2018 when regulations change. At present, A2M is the only listed Australian company with this approval from the Chinese regulator.

A2 Milk has a very strong balance sheet and an impressive business model, but the problem with the stock is its very success. A2M began the year at $2, and the record highs it is generating have pushed it to very heady levels. At $7.86 and expected FY18 earnings of 17.8 cents a share, on analysts’ consensus, investors are being asked to pay 44 times earnings. For FY19, on projected EPS of 23.1 cents, that ask becomes a still-demanding 34 times.

FN Arena puts analysts’ consensus target price at $6, for implied downside of 23.6%; Thomson Reuters has the consensus target at $5.87, at a 25.3% implied correction.

Monadelphous (MND, $16.40)

Market capitalisation: $1.5 billion

Analysts’ consensus price target: $12.40

Implied downside: –24.2%


Source: ASX

Former market darling Monadelphous has struggled in recent years, as the engineering group dealt with a downturn in investment in its core resources and energy markets. The mining boom had been wonderful for Monadelphous shareholders, as it moved from (the equivalent of) 7.5 cents when it floated in 1991 to a peak price of $26.29 in early 2013. Almost two years later, MND was back down at $6.00.

Profits and dividend payouts in FY16 and FY17 disappointed the market, but the stock price seemed unaffected, rebounding to $16.40, with an 87% rise so far in 2017. At that level, with large LNG-related work contracts due to finish in FY19, the work that Monadelphous is winning does not strike the market as adequate replacement.

Conditions are tough in its core Australian market, and the company recently closed its US joint venture, established in 2015 to explore shale gas opportunities (however, Monadelphous has expanded its presence in the Texas sector of that market.) It’s still early days with the company’s recent diversification into civil infrastructure; and with FY17 results broadly in line with what the market expected – and no formal guidance provided for FY18 – the stock is looking over-priced, trading on a FY19 price/earnings (P/E) ratio of 24.3 times consensus forecast earnings. Thomson Reuters reckons the analysts’ consensus target price for MND is $12.40, while FN Arena’s collation puts it at $12.25. Those numbers are well north of the current share price.

 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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