Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Greg Peel

Last week brought thirteen ratings changes in the FNArena database made up of three upgrades and ten downgrades, all either up to Buy or down to Neutral (or equivalents).

The upgrades were largely unrelated and covered transport, construction and property, but there was a couple of consistent themes among the downgrades. The first is quite simply the ongoing weakness in local consumer sentiment, leading analysts to concede that discounts to valuation are not enough reason to buy a stock when there's just no light at the end of the tunnel. In other sectors of the market, recent gradual share price improvements have led some stocks into fair value territory.

RBS has been conducting sector reviews for the new year. A review of the transport sector led to only one rating change – an upgrade for Brambles ((BXB)) to Buy. The analysts are looking to an improving US economy as a reason to invest in the performance of the CHEP pallet business. The upgrade came with a 22% increase in target price. An update on the local oil and gas sector revealed the stockbroker is working off an anticipated lower oil price this year, while expecting increased M&A interest. In line with many other experts, RBS prefers Santos ((STO)) among the larger producers and decided to downgrade Woodside ((WPL)) to Hold this week. That was before Woodside delivered a positively surprising production report, for the first time since 2005.

Popular REIT Goodman Group ((GMG)) has been having a good run of late, which is a bit of a shame given Credit Suisse had the stock on Neutral. GMG has suffered from dilution but CS expects that impact to wane over the next sixth months while transparency of capital structure and earnings improve. On that basis, CS has upgraded Goodman to Buy.

While Middle Eastern operations remain an issue, analysts were generally pleased with the Leighton Holdings ((LEI)) trading update last week which appeared to reduce the risk of further impairments amongst its local troubled assets. Such stability should be a comfort for the market suggested Macquarie, and this was enough for an upgrade to Outperform.

Citi had a look at the prospects for AGL Energy ((AGK)) this year, and while there is nothing of concern the analysts just don't see anything exciting happening for the utility. On that basis, they downgraded to Neutral. Citi also downgraded Commonwealth Property Office ((CPA)) to Neutral on recent strong performance, suggesting a share price in the low 90c area would prompt a return to Buy.

Credit Suisse was underwhelmed by a quarterly result from blood market competitor Behring, resulting in a rethink of FY12-14 earnings forecasts for CSL ((CSL)). A downgrade to Neutral followed.

JP Morgan analysts had put their faith in the restructuring of Dexion as a source of improved margins for GUD Holdings ((GUD)) and are generally of the opinion the stock looks cheap. But there's just no encouraging the Australian consumer as we move into 2012 and hence JPM has conceded there's little room for upside. A downgrade to Neutral followed.

The weak consumer market was also on BA-Merrill Lynch's mind when it decided it was time to downgrade Westfield Retail Trust ((WRT)) to Neutral.

Invocare ((IVC)) is not a big company but its earnings are of high quality and the stock is quite simply a classic non-cyclical defensive, noted Credit Suisse. One might thus also say dead boring, but IVC has been having a good run in this climate of consumer uncertainty. It's enough for CS to consider value to now be fair and hence the downgrade to Neutral.

QBE Insurance ((QBE)) has somewhat stupefied the analyst community. Once a can-do-no-wrong darling of any bull market, QBE shocked all and sundry with its big profit warning the week before last which has left analysts scratching their heads ever since. A lack of clarity is the issue, which was enough for Citi to decide to downgrade to Neutral last week, and to join peers in slashing forecast earnings.

Late last year there had been a lot of speculation that cold pie pedlar Spotless ((SPT)) was being sized up for a takeover. The SPT share price is up 35% without any improvement in earnings guidance and that interest seems to have dried up. Hence UBS downgraded to Neutral.

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