The broker wrap: five stocks to buy and nine to sell

Founder of FNArena
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Changes to stockbroker recommendations in the past week

Despite this growing stockbroker optimism, company downgrades continue to outweigh upgrades. This is either a barometer on the reporting season to date or an indication that recent market gains are making value harder to find. The FNArena database shows 28 ratings downgrades over the past week compared with just eight upgrades.


Among the upgrades was Commonwealth Bank (CBA), with Citi lifting its rating to Neutral to reflect a few factors becoming less negative than had been the case.

Also scoring an upgrade from Citi was Graincorp (GNC), the broker raising it to Buy after the company’s guidance for full-year earnings came in above expectations. The guidance remains conservative in Citi’s view.

Primary Health Care’s (PRY) interim result missed expectations, but full-year earnings guidance has been maintained, which was enough for both RBS Australia and Credit Suisse to adopt more positive views and upgrade it to Buy following recent share price underperformance.

JP Morgan upgraded Transfield (TSE) to Buy following its full-year guidance which showed more disciplined capital use and improved efficiencies. The broker sees an expected share buyback as supportive as well.


Macquarie thinks there is also longer-term value on offer in JB Hi-Fi (JBH), with consumer spending expected to recover eventually. Others struggle to see such value, as Credit Suisse downgraded the same stock to Sell given an uncertain medium-term outlook and few shorter-term catalysts.


AGL Energy (AGK) was among those stocks suffering a downgrade, with RBS moving to a Neutral recommendation. While a move by the company to acquire more of the Loy Yang A asset is likely, so too is a capital raising to pay for any such acquisition.

Alumina Ltd (AWC) has also been downgraded by both RBS and Credit Suisse to Neutral, the former because of the decision to pay a dividend rather than pay down debt, and the latter because of the lag in higher pricing flowing through to improved earnings.

Credit Suisse has also downgraded both AMP (AMP) and ARB Corporation (ARP) to Neutral, the former because the latest result showed a deterioration in balance sheet quality and the latter because of an elevated current earnings multiple.

For Beach Petroleum (BPT), Citi’s downgrade to a Sell comes despite guidance coming in well above the broker’s estimate. The big concern for Citi remains the cost and viability of the Cooper Shale Gas operations, which leaves the broker preferring the likes of Santos (STO) in the sector.

Citi also downgraded Bunnings Warehouse Property (BWP) to Neutral. It had a solid profit result, but showed a lack of valuation upside making any share price outperformance difficult from here.

Macquarie downgraded (CRZ) to Sell following its interim result, which showed downside risk than upside. This largely reflects Macquarie’s expectation of a market share war with rising competitor Carsguide.

David Jones (DJS) also offered some downside earnings risk in the view of Credit Suisse, enough for the broker to downgrade it to Sell. The broker also had some shorter-term concerns given the loss of Stephen Goddard as CFO.

Tough market conditions have seen Macquarie lower earnings estimates for GWA (GWA). The broker has downgraded it to Neutral.

Valuation is the reason UBS has downgraded James Hardie (JHX) to Sell, while RBS has downgraded Mermaid Marine (MRM) to Hold on the same basis.

Deutsche Bank has cut Leighton Holdings (LEI) to Neutral on a more cautious approach to the group’s Middle East operations, while tepid earnings guidance from Oakton (OKN) has prompted both UBS and Credit Suisse to downgrade it to Neutral.

Increased costs for non-core ventures prompted a profit warning from Mortgage Choice (MOC) and this was enough for UBS to downgrade it to Sell.

Among resource plays, both Oz Minerals (OZL) and Paladin (PDN) suffered two downgrades during the week, the former on valuation grounds and the latter given some concerns in the market with respect to cash generation ability leading into some debt maturities.

In the view of RBS, the slight miss with respect to earnings at Coles could put some pressure on the Wesfarmers (WES) share price, while Macquarie’s downgrade on Westfield Group (WDC) reflects better value elsewhere in the sector.

Lower margins and higher costs at Royal Wolf Holdings (RWH) saw Macquarie downgrade its rating to Hold, while the broker similarly downgraded its rating on Slater and Gordon (SGH) post what was perceived as a disappointing interim. Finally, recent share price outperformance from Tatts (TTS) has been enough for Deutsche Bank to downgrade it to a Hold rating.

Changes to earnings forecasts (EF)

Note: FNArena monitors eight leading stockbrokers on a daily basis. These 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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