There were low expectations leading into this reporting season, but there have been a good number of positive reactions to results. The problem is, which positive result reactions can we trust?
The final week of the reporting season again saw downgrades from brokers in the FNArena database outweigh upgrades, this time by a score of 35 to 17. However, there were more companies rated Buy than Sell. The ratings changes have brought total Buy ratings to 51.45%, down from 52.15% last week.
Changes to stockbroker ratings in the past week
Among the companies to receive more than one upgrade were James Hardie (JHX) and QBE Insurance (QBE). Upgrades for the former came from UBS and Credit Suisse, both moving to Neutral recommendations.
The changes followed a third-quarter result that gave some cause for optimism; the worst may be behind the company, particularly with the prospect of additional capital management initiatives going forward. Despite this, Macquarie downgraded it to Neutral on valuation grounds. More positive were the upgrades for QBE as Citi, BA-Merrill Lynch, JP Morgan and UBS all moved to Buy ratings. The changes reflect a combination of factors, including value in the stock at current levels, better understanding of the company’s margin outlook post its recent result and a more positive stance on general insurance stocks.
Another Buy was Aston Resources (AZT), Macquarie seeing some upside from the proposal for 10% of the group’s stake in the Maules Creek project to be sold. Deutsche Bank upgraded CSL (CSL) to a Buy given its view the company should continue to enjoy margin expansion in the coming years, while Citi has turned more positive on Insurance Australia Group (IAG) also in part due to an improved margin outlook.
Jetset Travelworld (JET) offers potential for a re-rating over the next 12 months according to Deutsche and this was enough to prompt an upgrade to Buy, while RBS Australia made the same change with Prime Television (PRT) given a somewhat more positive outlook and the potential for some corporate activity.
For Deutsche, the potential for grade and production caused it to upgrade Regis Resources (RRL) to Buy, though at the same time UBS downgraded it to a Neutral on the stock on valuation grounds.
ResMed (RMD) offers scope for an increased buyback boosting earnings per share, which sees Credit Suisse lift its valuation and move to a Buy. It was a similar story for Seven Group (SVW), as BA-ML no longer sees working capital as an issue and expects valuation support from the group’s media assets.
Warrnambool Cheese and Butter (WCB) was upgraded to a Buy by RBS following a stronger than expected profit result that implies good value at current levels, while JP Morgan upgraded Westpac (WBC) on relative valuation grounds following what appears to be excessive underperformance relative to ANZ Bank (ANZ). The broker downgraded ANZ to a Sell at the same time.
On the downgrades side, those receiving multiple cuts to ratings were Aristocrat Leisure (ALL), Australian Worldwide Exploration (AWE), Harvey Norman (HVN) and Newcrest Mining (NCM).
For Aristocrat, the downgrades were a factor of valuation after recent share price gains, as full year earnings were generally better than expected and prompted increases to earnings estimates and price targets.
UBS and Deutsche both moved to Neutral ratings on AWE from previous Buy ratings, again valuation calls following recent share price gains. Harvey Norman continues to deal with poor retail conditions and brokers now see additional pressure on franchise margins, which was enough for Macquarie and BA-ML to downgrade it to Sell. Newcrest also has some issues as Lihir is again proving a problematic asset, enough that full year production expectations have been revised lower. The changes saw JP Morgan and UBS downgrade to Neutral views as shorter-term outperformance now appears less likely.
The other most significant downgrade this week came courtesy of Macquarie, the broker moving to a Sell on Air New Zealand (AIZ) from a Buy previously. The change in view reflects still tough operating conditions given a combination of weaker long-haul demand and increases to operating costs.
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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