REPEAT Rudi’s View: Some Outperformers Are More Equal Than Others

This story features RESMED INC, and other companies. For more info SHARE ANALYSIS: RMD

FNArena editor Rudi Filapek-Vandyck shares his views and insights on irregular basis with subscribers. Occasionally, these views are made accessible to non-paying members and readers elsewhere. This story was originally published on Wednesday, July 07, 2010.

By Rudi Filapek-Vandyck

Has anyone else picked up that shares in ResMed ((RMD)) have gained around 12% since the Australian share market peaked in mid-April?

Yes, that is correct. While broad market indices lost circa 16% in a little less than three months, and with many stocks suffering even larger losses, ResMed shares have actually gained more than 10%.

There are a few more reasons why ResMed currently sits above others in the Australian share market: despite this strong performance, and why securities analysts remain positive on the shares, with apparently no reason to lower earnings estimates.

Current consensus sees ResMed growing earnings per share by more than 21% in fiscal 2011. This is well above the market average, considering current consensus for ASX200 companies overall is some 19% growth, but that number is pumped up by big leaps forecast for BHP Billiton ((BHP)), Rio Tinto ((RIO)), Fortescue Metals ((FMG)) and other resources companies.

If we stick to industrial companies only, the projected growth rate lies closer to 12%, so ResMed is effectively beating the rest of the market (ex-miners) by half (more or less). And even then, the consensus price target for the shares is still some 16% above the share price.

Would you believe, there is still more good news to tell about ResMed. At a time when nervous investors are watching price charts for the ASX200 and the All Ordinaries, and leading indices in the US, for any clues whether a head-and-shoulders pattern will be confirmed, or whether the Black Cross will be followed through, ResMed shares look solid and healthy on price charts too.

As I pointed out in my story on healthcare stocks last week, and again in my Weekly Insights story on Monday, ResMed shares are still trading above their 60 daily moving average (M/A), and the 60 M/A is still well above the 200 M/A.

If there is one healthy looking stock in the Australian share market at this point in time, surely that stock is called ResMed.

Before we go any further, let's recap all of the above main characteristics about what makes ResMed such a standout, because that will help us in looking for similar examples elsewhere:

1.ResMed shares have risen while others have plummeted
2.Consensus expectations are for solid, strong growth in fiscal 2011
3.Stockbroker price targets are still well above the present share price
4.The share price is (just) above the 60 M/A
5.The 60 M/A is (well) above the 200 M/A

In my Weekly Insights on Monday I reported 120 out of the top 200 ASX-listed companies have now put a Black Cross on price charts (when 60 M/A decisively falls below 200 M/A). I estimate there are around 35 others who are either close or on the verge of generating a Black Cross, so this automatically leaves a small group of ASX200 members who could potentially share the main characteristics of ResMed.

Long story cut short: further analysis has generated a list of 17 stocks that look healthy on characteristics 4 and 5 (the two trendlines). Of these companies, three are take-over candidates (Lihir ((LGL)), Centennial Coal ((CEY)) and Healthscope ((HSP)), and five others are gold miners (Avoca ((AVO)), Eldorado ((EAU)), Kingsgate ((KCN)), St Barbara ((SBM)) and Independence Group ((IGO)).

The latter group of stocks deserves some extra attention: many an investor in the Australian share market has been frustrated over the past few years by how gold in USD made some hefty advances, but because the Australian dollar did so too only a trickle of the gold bull market was felt by Australian gold miners.

Everybody keeps on talking about gold hovering near all-time highs, but in effect the gold price in USD hasn't gone anywhere since early December last year. The price today is effectively still at the same level as back then.

However, the Australian dollar has made some significant retreats over the past nine months and this now sees Australian goldminers outperforming the rest of the pack in the share market. Just goes to show, investing in gold exposure in Australia is a little more complex than in the US.

A special mentioning goes out to characteristic number 3: the intrinsic valuation of the stock.

Those who have been reading my analysis over the years know that I am a big fan of consensus price targets. My survey this week has again strengthened my view on the value of these consensus targets. Several stocks that equally looked good on charts as ResMed and whose share price equally displayed strong performance, have fallen from grace towards the end of June/early July.

Examples are Iress ((IRE)), Seek ((SEK)), Cochlear ((COH)), Seven ((SEV)), Invocare ((IVC)) and The Reject Shop ((TRS)).

Why have these stocks not been able to continue following the example set by ResMed? Because they had become too expensive. Without one single exception the share prices had either exceeded consensus price targets, or came very close to exceeding these targets and obviously the next conclusion to be drawn by investors was that further upside simply was not there.

Investors might want to heed this message because two other stocks that equally look good on charts, and whose share prices have held up pretty well since mid-April, are Coca-Cola Amatil ((CCL)) and Fleetwood ((FWD)).

Fleetwood has bounced off the $10 mark (consensus price target $9.71) but I suspect the shares will find solid support around the current price level of around $9.24 because of the implied 7.7% dividend yield on FY11 consensus estimates.

Special note: my survey has shown that other stocks with even higher implied dividend yields have not equally held up as well as Fleetwood. This is, in my view, a strong message from the market. Investors believe there is little risk to pay-out and earnings projections regarding Fleetwood. Obviously, they don't think the same when it comes to those other companies. But at $10, Fleetwood shares become too expensive nevertheless.

The other stock, Coca-Cola Amatil, is in my view in danger of becoming the next stock to temporarily fall from grace. This is because the share price recently touched $12 (a few times) and the consensus price target is only $11.37.

Even if these targets prove too conservative, which would imply securities analysts will have to raise their forecasts instead of lowering them as they will be doing for most other stocks in the weeks ahead, it still seems like this stock has arrived at full value at this point in time.

Note that Coca-Cola Amatil shares are trading at circa 16 times projected EPS for FY11, while consensus growth is above 9%. Seems a bit rich, doesn't it?

This leaves us with the remaining seven stocks, of which ResMed has already been discussed. So that leaves us six.

Here are my thoughts (in no particular order):

Amcor ((AMC)); after spending years in the doghouse, the market is clearly expecting a turnaround in the company's fortunes. Recent acquisitions, including Alcan's US Medical Flexibles, suggest future earnings growth could be strong.

Consensus projections see Amcor's EPS jump by some 38% in FY11 and I think the fact that the share price has held up this year is a sign that investors are again warming towards the stock.

Consensus price target is $7.30, still more than 10% above the current share price, so value isn't an obstacle.

Australian Agricultural Co ((AAC)); clearly investors are taking a positive view towards a pending turnaround for this company too. Securities analysts believe the operational environment for the company should only improve from here on. The price chart clearly show a “Golden Cross” – the exact opposite of the feared Black Cross.

RBS Australia, the only stockbroker in our universe who covers the stock, suggests there is upside in the order of 32% in the year ahead.

Foster's ((FGL)); similar as in the case of Amcor, I think the market is taking the view that after several dismal years Foster's fortune is about to make a U-turn. I do note that recent research reports on the company had a positive undertone if only because the market may have become too bearish on the company, which is not that strange given the track record following the purchase of Southcorp.

There is, of course, still the option of splitting beer from wine and that should attract potential suitors. I do note the consensus price target of $5.72 is not that far above the share price, which could imply further upside will remain limited in the short term.

It's either that or targets will be raised as research updates will be released because all analysts that have issued reports on Foster's recently used targets between $6.20-$6.50. Foster's price charts show a Golden Cross too.

Iluka ((ILU)); I don't exaggerate when I say “dog number four”. Clearly, investors are now banking on the fact that Iluka's fortune has finally turned the corner and recent analyst reports seem to point into this direction.

Come to think about it: Iluka's performance of an essentially flat share price over the past three months is even more impressive considering many small cap resources have fallen by 20-30%, and sometimes by more over the period.

Clearly, a strong performance is expected for FY11 and judging by recent price action, which puts the stock on a Price-Earnings ratio of 13.6 for FY11, Iluka's financial performance is expected to be even better than what consensus is already projecting.

Riversdale ((RIV)); share prices of many producers of bulk commodities have held up reasonably well, but none has been able to match Riversdale's performance. This is the equivalent of ResMed for the commodities stocks, though arguably with a much higher risk profile.

Note that the share price is well above what most securities analysts are willing to put up in terms of price targets and valuations. This is likely a difference in risk-assessment.

A lot is happening regarding the development of Riversdale's Zambeze coal project, but a lot still has to happen too. Still, this never stopped investors from embracing Fortescue well before the first shipment of iron ore was achieved. A similar attitude seems to have fallen into the lap of Riversdale.

And last, but not least, Singapore Telecom ((SGT)). This is the blank spot in my analysis. I have no idea whatsoever why SingTel shares have remained among the star performers in the Australian share market, other than that investors tired of Telstra ((TLS)) shenanigans might have decided telco-exposure is more solid and safe with the Singaporean parent of Optus.

Admittedly, projected EPS growth for SingTel is around 14% for FY11 and FY12 each, which is well above what Telstra could ever manage. There is some speculation about an increase in dividends, a float for Optus or even a capital return next year. I am not sure whether any of the above is a sufficient explanation, but 14% seems okay and so does the Golden Cross on price charts.

So here you have it, today's outperformers in the Australian share market (ASX200) consist of gold companies, former dogs that are now likely to turn around, plus African developer Riversdale and Singapore Telecom. Plus ResMed which seems on all accounts the less risky, most solid option.

Note: glove and condom manufacturer Ansell ((ANN)) could have been included in the list of 17, but since the share price is already above the consensus target, I suspect Ansell will become the next Iress, Seek or Cochlear.

Also note: three out of the five mentioned gold producers equally display a Golden Cross on price charts.

All information and data used for this analysis is available for paying subscribers every day on the FNArena website.

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