Where’s The True Market Value?

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This story features BHP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Rudi Filapek-Vandyck

We still have to conduct a few more updates, but it would appear earnings forecasts for Australian companies have risen slightly into September, putting the average earnings per share lift for fiscal 2011 on 20% compared with 19%-something in August.

While this may not seem like much, readers have to take into consideration that these are averages for ASX200 stocks on the basis of calculated consensus data from nine leading stockbrokers in Australia. It takes some big changes to push up such a number.

Also, don't forget these averages stopped rising in April and have been in steadily decline since.

So what has changed? In one word: commodities. In two words: bulk commodities. In one sentence: analysts have been upgrading price forecasts for bulk commodities for the years ahead.

Note these upgrades come in the face of actual price falls in contract prices for coal (all sorts of varieties) and iron ore for the third and fourth quarter of calendar 2010. From this perspective, it would seem we are yet witnessing a case of less bad news is positive. Certainly in this case, as projections for the years ahead are actually going up.

Some interesting details to share in this context are: gaps between share prices and consensus price targets as measured by FNArena are clearly the largest for resources stocks in the Australian share market right now; plus stocks such as BHP Billiton ((BHP)) and Rio Tinto ((RIO)) enjoy much higher growth projections than the 20% mentioned above.

Clearly, not every stock is equal in the present Australian share market.

Strategists at some of these nine leading stockbrokerages have zoomed in on the share market's prospects and valuations this morning. One of these is Goldman Sachs. Given the above it probably does not come as a surprise the broker has increased its Model Portfolio's exposure to Australian commodities.

Or as Goldman Sachs prefers to call it: the Materials sector. Goldman Sachs is now Overweight Materials through the likes of Amcor ((AMC)), Orica ((ORI)), PanAust ((PNA)) and Iluka ((ILU)). Other sectors that are equally Overweight are Transportation (think Qantas ((QAN)) and Asciano ((AIO)), media companies (Ten ((TEN)), retail ((Wesfarmers ((WES)) and Myer ((MYR)), utilities ((AGL Energy ((AGK)) and what the broker calls “commercial services”. The latter group includes UGL ((UGL)), Bradken ((BKN)), Brambles ((BXB)) and Computershare ((CPU)).

Note these are only some of the stocks represented in the Model Portfolio. Goldman Sachs has, for example, simultaneously increased exposure to gold and copper miner Newcrest ((NCM)).

Goldman Sachs has also left its estimation for the ASX200 index by year end unchanged at 5075, which would imply a “soft” break-out for the market from the sideways trading range that has remained in place since August 2009.

By December 2011, forecasts Goldman Sachs, the index should be at 5650.

Strategist at Deutsche Bank, proudly wearing the title of Super-Bull in Australia for a while now, are understandably equally positive on Australian shares. Deutsche Bank is projecting 20% growth in earnings per share for FY11, to be followed by 15% growth in FY12 and this simply must translate into a positive return for the years ahead, suggest the strategists, especially since the forward Price-Earnings ratio on the wholesale broker's calculations has fallen to less than twelve.

Note: on my personal observations these widely used PE ratios for the Australian share market appear to make the market look more attractive than it really is, but I will return on this matter at a later stage.

Deutsche Bank too would advise investors' portfolio's are biased towards mining stocks, and slightly Underweight the banks. The strategists like in particular stocks that have consumer exposure, which explains why the strategists are also Overweight retailers, media and shopping centre operators.

Just to be sure, Deutsche Bank also thinks a flavour of defensive stocks, just to be sure, should be thrown into the mix. After all, conclude the strategists, the US economic recovery is a rather weak one, on historical references, and risks remain.

Strategists at UBS are still playing the post-August reporting season theme, reminding investors that those stocks whose share price responded well to the released results are likely to continue performing better than those companies whose share price did the opposite.

In addition, UBS strategists point out the second half of each calendar year sees investor focus in Australia usually switch to dividends. Given the overall cautious mood this year, this is hardly going to be different from here on.

Another way of assessing whether stocks are likely to outperform or underperform from here on, suggest the strategists, is by throwing the tax rate into the mix. If a result was better than expected, and the tax rate was still relatively high, you simply know you have a genuine outperformer at hand, suggest the strategists.

However, some companies only beat market expectations because their tax rate unexpectedly dropped. These companies, suggest the strategists, are more likely to underperform. They have conducted some historical analysis to back up their claim.

According to UBS, both QBE Insurance ((QBE)) and Iress ((IRE)) enjoyed a lower than expected tax rate, while surf retailer Billabong enjoyed a lower tax rate and still surprised in a negative sense with its released results.

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