Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

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By Chris Shaw

In what may be either a barometer on reporting season to date or an indication recent market gains are making value harder to find, the FNArena database has seen 28 ratings downgrades over the past week. This compares to just eight upgrades and means total Buy recommendations now stand at 53.86%.

Among the upgrades was Commonwealth Bank ((CBA)), where Citi lifted its rating to Neutral from Sell to reflect a few factors becoming less negative than had been the case. Changes to earnings estimates meant a lift in price target and this also supported the rating upgrade.

Also scoring an upgrade by Citi was Graincorp ((GNC)), the broker moving to Buy from Neutral as the company's guidance for full year earnings came in above expectations. The guidance remains conservative in Citi's view and with valuation attractive at current levels a more positive rating is now justified. Price target was also increased.

There is also longer-term value on offer in JB Hi-Fi ((JBH)) in the view of Macquarie, who expects an eventual recovery in consumer spending and so an eventual recovery in the JB Hi-Fi share price. Others struggle to see such value, as Credit Suisse downgraded to Underperform from Neutral on the stock given an uncertain medium-term outlook and few shorter-term catalysts.

While Primary Health Care's ((PRY)) interim result missed expectations full year earnings guidance has been maintained, which was enough for both RBS Australia and Credit Suisse to adopt more positive views. Both brokers upgraded to Buy ratings from Neutral previously, with valuation the catalyst for the change following recent share price underperformance.

Interim earnings from Transfield ((TSE)) and updated full year guidance didn't prompt a lot of changes to broker models, but JP Morgan saw enough to upgrade to Overweight from Neutral. More disciplined capital use and improved efficiencies are positives, while the broker sees an expected share buyback as share price supportive as well.

AGL Energy ((AGK)) was among those stocks suffering a downgrade in rating, RBS moving to a Neutral recommendation from Buy previously. This is because while a move 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 ratings from Buy, the former as while earnings were as expected the decision to pay a dividend rather than pay down debt was disappointing. For Credit Suisse the problem is the market and while prices mean some capacity will be removed, it will take some time for higher pricing to flow through to improved earnings for Alumina.

Credit Suisse has also downgraded both AMP ((AMP)) and ARB Corporation ((ARP)) to Neutral from Outperform recommendations, the former as the latest result showed a deterioration in balance sheet quality and the latter on valuation grounds given an elevated current earnings multiple.

For Beach Petroleum ((BPT)), Citi's downgrade to a Sell from Neutral 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 from Buy, as while a solid profit result was posted a lack of valuation upside is likely to make any share price outperformance difficult from here.

Macquarie downgraded Carsales.com ((CRZ)) to Underperform from Outperform as post the interim result there appears to be more downside than upside risk. This largely reflects Macquarie's expectation of a market share war with rising competitor Carsguide.

David Jones ((DJS)) also offers some downside earnings risk in the view of Credit Suisse, enough for the broker to downgrade to an Underperform rating. The broker also has some shorter-term concerns given the loss of Stephen Goddard as CFO.

Still tough market conditions have seen Macquarie lower earnings estimates and price target for GWA ((GWA)). The broker has downgraded to a Neutral rating from Outperform. Valuation is the issue for James Hardie ((JHX)) according to UBS and sees a downgrade to Sell from Neutral, while RBS has downgraded Mermaid Marine ((MRM)) to Hold from Buy on the same basis.

A more cautious approach to the group's Middle East operations has been enough for Deutsche Bank to downgrade Leighton Holdings ((LEI)) to a Neutral rating from Buy previously, while tepid earnings guidance from Oakton ((OKN)) given still tough IT markets has prompted both UBS and Credit Suisse to downgrade to Neutral ratings from Buy previously.

Increased costs for non-core ventures prompted a profit warning from Mortgage Choice ((MOC)) and this was enough for UBS to downgrade to a Sell rating from Neutral. Earnings estimates were also adjusted lower, meaning a cut in price target.

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 forecasts and its recommendation to Neutral from Outperform, 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 to a Hold rating. 

Most significant in terms of changes to price targets were increases for Domino's Pizza ((DMP)) as brokers lifted estimates on the back of a strong interim result, while targets for Alumina Ltd and Paladin both fell as lower earnings forecasts were incorporated into models. 

Total Recommendations	Recommendation Changes
Broker Recommendation Breakup

 

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