Australia | Jan 11 2010
By Chris Shaw
The FNArena database shows Billabong ((BBG)) is rated as Buy just once, compared to five Holds and three Sell recommendations, but in the view of Morgan Stanley the market is missing one important potential positive for the company; a weaker US dollar.
As Morgan Stanley notes January is an important period for the company with respect to hedging its cost of goods sold, which are almost entirely denominated in US dollars. About 40% of Billabong’s Australian cost of goods sold and about 45% for its European operations will be hedged this month and the recent weakness in the greenback suggests this hedging will be done at rates up to 27% cheaper than in the previous corresponding period.
This suggests on a cost of goods sold per unit basis 2011 should be cheaper than 2010 by around 7%, which supports the Morgan Stanley expectation of around 300 basis points in margin expansion with respect to EBITDA (earnings before interest, tax, depreciation and amortisation) in fiscal 2011.
At the same time, Morgan Stanley’s view is while there are some cost of goods sold headwinds in play for 2010, management has provided good visibility on this issue for several months and so this has been effectively included in the earnings guidance offered for the current year, meaning there is less risk of any significant disappointment from a surprise in this area.
Factoring this in sees its forecasts for earnings per share at 70c in FY10 and 84c in FY11, which is well above consensus forecasts according to the FNArena database of 60.3c and 72.8c respectively. Morgan Stanley’s price target based on its earnings forecasts is $15.00, which again is well above the average target according to the database of $10.76.
While Morgan Stanley is optimistic, Credit Suisse argues some caution is justified as in its view there remains considerable risk with respect to Billabong’s earnings in FY10 and FY11 as estimates already incorporate a substantial improvement in both sales and margins. To reflect this Credit Suisse is one of the brokers with a Neutral rating on the stock, though its target price of $12.30 remains well above the average target given it sees upside for patient investors.
Shares in Billabong today are slightly weaker and as at 10.20am the stock was down 10c at $11.45, which compares to a range over the past 12 months of $6.09 to $12.19.
