Consensus Too High For Fleetwood?

This story features FLEETWOOD LIMITED. For more info SHARE ANALYSIS: FWD

 – Lower occupancies and margin pressure weighing on Fleetwood's earnings
 – Credit Suisse cuts its forecasts, suggests consensus estimates are too high
 – Broker reiterates its Underperform rating on the stock

By Chris Shaw

The FNArena database shows Fleetwood Corporation ((FWD)) is rated as Buy twice, Hold twice and Sell (Underperform) once, with a consensus price target of $11.01. One of the outliers in price target terms is Credit Suisse, which has cut its target to $9.60 from $12.08.

The reduction in price target reflects Credit Suisse's view expectation earnings for Fleetwood in FY13 will be impacted by lower occupancy rates at the Searipple facility and lower margins in the manufactured accommodation business. 

According to Credit Suisse, 1H13 accommodation earnings are likely to be less than half what was achieved in 1H12, as occupancy rates at Searipple have fallen to 40-50% from around 90% at the same time last year. This means negative operating leverage for Fleetwood.

While some improvement is expected in 2H13 Credit Suisse notes there remains oversupply in the Karratha region, which offers scope for room rates to be pushed lower. As well, the broker points out profits in the manufactured accommodation business are being impacted by lower levels of high margin work in the resource sector. 

The Recreational Vehicle division should be able to generate some cost savings by the transfer of some manufacturing to Western Australia, but Credit Suisse points out this will likely be offset by weak consumer demand.

To reflect this view of Fleetwood's markets, Credit Suisse has cut its earnings per share (EPS) forecasts by 28% in FY13 and by 13% in FY14 to 66c and 95.4c respectively. These revised estimates compare to consensus forecasts according to the FNArena database of 75.2c and 95.0c respectively.

The difference underpins the argument of Credit Suisse that the market is not pricing in enough of an impact from lower occupancy rates and margin pressures. With downside risk to consensus earnings forecasts, Credit Suisse maintains an Underperform rating.

This view differs from the likes of Macquarie, who viewed share price weakness related to a soft first quarter trading update as a buying opportunity in the stock given the expectation of a relatively rapid recovery in earnings in the second half of FY13 and into FY14.

JP Morgan and CIMB Securities sided more with Credit Suisse last month in suggesting there was scope for cuts to consensus estimates in coming months, both brokers downgrading ratings from Buy to Hold.

The counter argument of UBS is the stock offers value at current levels assuming existing earnings expectations are met, especially given share price weakness following the August profit result.

In a stronger overall market shares in Fleetwood today are slightly higher, trading up 1c at $9.71 as a t 11.40am. Over the past year the stock has traded in a range of $9.31 to $13.46, the current share price implying upside of around 14% to the consensus target in the FNArena database.

 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms