Tag Archives: Transport

Earnings Downgrades To Drive Further Weakness?

By Chris Shaw

Over the past couple of weeks there has been an escalation of tension in the Korean Peninsula, further bank and credit problems in Europe and an apparent weakening of momentum in US leading economic indicators. Citi notes an increased level of despair in the global investment community.

At the same time, Citi notes some in the US market are trying to call a bottom, which implies the current bad news appears to be starting to be priced into equity markets. Valuation is certainly looking better but this doesn't usually signal an imminent rebound, Citi pointing out valuation is a necessary but insufficient condition to turn the tide of the market on its own.

Uncertainty remains an issue for GSJB Were, thanks to factors such as the proposed RSPT in Australia and sentiment flows surrounding China, though Citi's commodity analysts suggest the latest data indicates speculators have been taking profits but not aggressively shorting metal markets during recent turmoil.

There are reasons for this, as Citi points out demand indicators for developed economies remain robust, even in Europe, which should support commodity demand. As well, it suggests in China the concerns over the possible impact of a slowing in the housing market may also be overstated as housing accounts for only 10-15% of base metals demand.

With the increase in risk aversion, GSJB Were notes investors have temporarily shifted back to more defensive names, which also reflects concerns over the potential for earnings downgrades to increase as the focus shifts to FY11.

Such downgrades in the US are likely according to Citi, as the analysts take the view a trimming of earnings estimates for 2011 in particular still needs to be addressed. In other words, the upward earnings estimate revision trend needs to pull back from current levels. This process would create a setting from which an equity rally can be more sustainable.

As Citi notes, the market overall does appear reasonable value, as various analysis tools suggest equities are tending towards cheap at current levels. As an example the broker points to its highly correlated trailing P/E to bond yields and equity risk premium model, which currently implies the US S&P500 is more than 25% undervalued.

In Australia, Citi estimates earnings are currently around 17% below trend or “mid-cycle” levels, which reflects the 30% fall in earnings between February of 2008 and September of 2009. Given this, the broker suggests if global macro risk concerns weaken from current elevated levels the market would be entering a downturn with an earnings base with less downside risk.

The important point here is this would be in stark contrast to the 2008/09 recession, as at that time the earnings backdrop was one of peak cycle numbers that gave scope for massive cuts to estimates. On Citi's forecasts Australian equities should deliver 27% earnings growth in 2011 while consensus numbers suggest growth of around 25%.

Even if no earnings growth is delivered over the next 12 months, Citi estimates valuations on the market would be no higher than the long-run average of about 14.8 times earnings. This means for the market to start looking expensive earnings next year would now need to be downgraded by around 30%.

If only half the forecast earnings growth over the next year is achieved, which implies growth in earnings of 12.5%, the Australian market's forward price to earnings ratio would still only rise to 13.2 times. Citi regards this as still cheap relative to long-term historical averages.

The 800-pound gorilla is that equity market valuations also appeared cheap in September of 2008, just prior to the collapse of Lehman Brothers. This time around the issue is sovereign debt but rather than a sharp collapse, Citi sees this as a slow bleed issue, meaning it will be a headwind for equities through the next decade.

But for equities to take a another significant downward leg Citi suggests it would require a complete capitulation in all forms of confidence, something that would lead to massive earnings downgrades. But as such an extreme shock event is unlikely in the analysts' view it follows that equity market prices at present represent great value rather than a value trap.

Medium-term there are a number of factors Citi sees as supportive to earnings growth, including ongoing solid population growth, lower corporate gearing levels and an expectation of ongoing improvement in Australia's terms of trade.

These also supports the broker's view the Australian market offers value at current levels.

Given current market conditions and expectations GSJB Were's model portfolio is currently overweight the Materials, Commercial Services, Transport, Media and Retail sectors, while the broker is underweight the Banks, Insurance, REITs, Healthcare, Consumer Staples and Utilities sectors.

With respect to specific stock positions GSJB Were has its five largest overweight positions in ANZ Banking Group (( ANZ)), Wesfarmers ((WES)), National Australia Bank ((NAB)), News Corporation ((NWS)) and Qantas ((QAN)).

Its five largest underweight positions are Commonwealth Bank ((CBA)), Telstra ((TLS)), Woolworths ((WOW)), Westfield ((WDC)) and QBE Insurance ((QBE)).

Virgin Bleeds As Qantas Holds Firm

By Greg Peel

I have never been a fan of longer term investment in airlines. Traders can find shorter term price fluctuations to exploit, but historically airlines are struggling businesses unless they can sufficiently lever off route protection.

If the global economy is solid, holiday-makers and business executives take to the sky, bringing more planes out of hangers and even more airlines into being, thus increasing competition. Just look at the difference in a ticket price now per average wage than two decades ago. And if the economy is strong, so is the oil price, leading airlines to either lose margins or pass on costs to passengers and thus lose market share.

If the global economy is weak, oil prices fall but passenger demand drops off anyway, and planes have to be mothballed again. Small airlines go out of business. It's all a bit damned if you do and damned if you don't, and that's before one considers the rapid development of more and more sophisticated teleconferencing systems exploiting faster broadband speeds. I mean, who actually wants to fly if they don't have to?

It was only three weeks ago that Virgin Blue ((VBA)) effectively downgraded its FY10 profit guidance from a range of $80-120m to the “low end” of the range, so let's just say $80m. Not a major downgrade, but a downgrade nevertheless. Virgin cited falling demand in the leisure market as the reason for weaker profit expectations.

Then only three weeks later, Virgin absolutely slashes its guidance again, down to a range of $20-40m citing exactly the same reason. Now that's a downgrade. It was all about “rapid deterioration and increased volatility in operating conditions”, management noted.

In simple terms, Australians have suddenly stopped booking holidays to Virgin's destinations. Virgin's no frills service, competitive pricing and cutesy “fun” persona provides the airline with a heavy weighting to the leisure passenger and a light weighting to “premium” passenger, which is basically someone flying on business. Business passengers tend to prefer the higher service/higher cost Qantas ((QAN)) on domestic routes or if not the cheaper Qantas joint-ventured Jetstar. Many businesses run longstanding accounts with Qantas meaning executives simply fly on Jetstar without being given the option of Virgin anyway.

But then Jetstar competes with Virgin in the leisure market, and more recently Tiger Airways has joined the fray to take on both. In Australian airline history, no “third airline” has ever lasted very long, but then which one is third?

The fresh and significant profit downgrade from Virgin has forced brokers to slash their earnings forecasts, in some cases over 50%. Six out of eight brokers in the FNArena database previously rated Virgin a Buy, largely citing a share price shattered by the GFC and prospects for recovery. But today both RBS and UBS have downgraded to Hold, leaving Virgin with a 4/4/0 Buy/Hold/Sell ratio. For the remaining Buy-raters, the fall in Virgin's stock price from over 75c in March to 31c yesterday is enough to consider value is still apparent at knock-down prices.

But on the same day that Virgin slashed its FY10 profit guidance, Qantas reaffirmed its own ($300-400m). Qantas, too, has suffered from a drop-off in demand in the lower-cost leisure sector, but as solid April traffic numbers show, Qantas has seen an off-set from recovering demand in the “premium” sector. Qantas boasts an 8/2/0 ratio in the FNArena database.

With consumer demand in general now taking a hit from rising local interest rates and a run of general bad news, led by the European debt crisis, holidays have taken a back seat again. Nervous falls in the stock market also mirror nervousness in discretionary spending. The outlook for Virgin is unlikely to improve in the short-term and the average target price in the FNArena database has today been cut from 73c to 47c. The Qantas target remains steady at $3.27.

Regulator To Standardise Broker Ratings

By Greg Peel

The Australian Securities and Investment Commission has been charged with the task of reassessing and consolidating investment advisory compliance rules in the wake of the Global Financial Crisis. A similar process is being carried out in all developed economies as a result of a G20 finance ministers' commitment to move toward more regulatory consistency across the globe.

Areas of focus include the problem of “too big to fail” in regard to financial institutions, the problem of opaque over-the-counter financial derivatives, and the issue of government guarantees of bank deposits. But also high on the agenda is a need for further protection for the retail investor.

Last year ASIC commissioned a survey of Australian retail investors, focusing particular attention to those hard hit by the GFC and its subsequent impact on financial markets. The burgeoning self-managed superannuation fund pool of investors was an obvious place to start.

ASIC has been receiving details of the survey over the first quarter 2010, and has this morning released a memorandum citing one particular complaint from investors that came up in the survey time and time again. Investors find stock broker recommendations confusing and misleading, and in many cases money had been lost by following recommendations closely.

“Many participants were incensed,” suggested ASIC spokesperson April Tromper, “that some stocks in their portfolios were still under 'Buy' ratings with brokers even as they lost up to 60% in value. Many claimed to be confused by the meaning of 'Buy', 'Outperform' and other typical ratings and how they differed from one another.

“Most of all it seemed,” said Tromper, “that investors could not understand why one broker can say 'Buy' when another says 'Sell'”.

This is hardly news to FNArena, which often fields email inquiries of exactly the same nature.

There are three major ratings scales used by brokers in Australia as well as across the world, being Buy, Hold or Sell; Outperform, Neutral or Underperform; and Overweight, Neutral or Underweight. In the last case, Equal-Weight can also be used in place of Neutral. In some cases, variations of combinations are used.

To further confuse the issue, some brokers stretch their ratings to a total of five, thus including mid-tier ratings such as Accumulate or Reduce.

In each case, it is the intention of the broker, or stock analyst, to convey the same meaning. Buy, Outperform or Overweight all mean investors should hold a greater proportion of the stock in question than its index weighting suggests. Sell, Underperform or Underweight means hold less, and Hold, Neutral or Equal-Weight means hold the equivalent index weighting.

However, the average small investor does not hold a portfolio equivalent to, for example, the ASX 200, upon which these ratings are based.

It becomes more confusing when the concept of target prices are introduced.

“Yes it's true that sometimes we can apply an Overweight rating to a stock even when the trading price has already exceeded our target price,” said one analyst from a major house I spoke to this morning, who for obvious reasons wished to remain anonymous. “Occasionally we even confuse our institutional clients”.

It would be a littler simpler if all brokers stuck to one popular formula – one in which a Buy rating was applied if the traded price was below the broker's target price, Sell if above, and Hold if on or near. This is the usual process, and indeed some brokers trigger ratings changes by a purely objective price formula rather than any form of subjective view.

But this still does not resolve the issue of how a retail investor – the numbers of which were very strong ahead of the GFC in proportional share holding terms – is meant to resolve the different ratings used by brokers, or the instances in which one broker says Buy and another Sell for the same stock at the same time.

The proposal put forward by ASIC this morning is to standardise all broker ratings for the benefit of the retail investment community. ASIC was not yet specific on which system would be enforced, although the early suggestion is that Buy, Hold, Sell is the simplest to appreciate.

Furthermore, stock brokers would be required to register their ratings changes with ASIC ahead of the release of research reports and provide justification for that change by means of a new compliance document currently being drawn up by the regulator.

In a move that will most unnerve the sell-side community, ASIC also intends to mark those ratings changes against prevailing trading prices and track broker performances. In the case, for example, of a broker maintaining a Buy rating on a stock that is continuing to lose value, ASIC intends to take some form of punitive action.

“The system will be akin to the 'speeding ticket' system in use for listed companies,” explained Tromper, “in which companies are obliged to justify unusual stock prices movements and can be fined for breaches of disclosure regulations. Brokers unable to justify their stock ratings will also be subject to potential fines and possible loss of trading licence”.

ASIC further intends to issue “please explain” notices to brokers whose ratings on a particular stock do not match consensus, such as a broker who publishes a Sell rating when the great majority of peers is recommending Buy.

“It is a lack of consensus that confuses many retail investors,” Tromper suggests, “and ASIC believes it is in the interest of the investment community to increase compliance among the broking industry”.

The response to this memorandum from FNArena's contact at the major broking house cannot be printed, but suffice to say ASIC has a fight on its hands if it is to see these new rules passed into legislation. However, we are already aware that Australian banks are currently in fear of upsetting the government in an election year lest they incur the wrath of those campaigning. It would be popular with the electorate if policies were put forward for much greater bank regulation.

To that end, the broking community might also be best served by ceding to ASIC's wishes.

Competition Weighing On Cabcharge

By Chris Shaw

Cabcharge ((CAB)) reported a market share for October of 57.7%, a result Macquarie notes was largely flat on September but well below the 63.4% share reported in August. The analysis reflects the Macquarie Taxi Tracker, which includes all Macquarie trips paid for with an American Express card but doesn't include E-tickets, blue dockets or branded Cabcharge cards.

While this skews results in favour of the Sydney and Melbourne markets, Macquarie still sees it as a reasonable reflection of industry conditions given these markets represent the highest level of competitor activity for the company.

The numbers show competition is increasing as the tracker notes Taxi Australia Serivces, which operates out of Lakemba in Sydney, has now established itself as the fourth competitor in the market with a share of around 3.4% compared to Cabcharge, GM Cabs with about 25% share and TaxiEpay with around 8.2%.

Given the decline in market share Cabcharge has experienced in recent months, Macquarie suggests the key issue is whether or not any cyclical increase in volumes can offset the acceleration in market share decline, as this issue will determine how Cabcharge stacks up as an investment proposition.

In Macquarie's view the outlook is not so positive as earnings risk remains to the downside at present, while there is also the issue of an ACCC court case against Cabcharge to be resolved. This could also weigh on the share price in the meantime.

Credit Suisse similarly has some concerns over the earnings outlook, lowering its forecasts for Cabcharge to reflect a weak September quarter relative to the previous corresponding period. The change impacts on both FY10 and FY11 numbers, with taxi payment revenue forecasts cut by 7.3% in both cases to $84.8 million and $92.8 million respectively, which compared to the $87.5 million generated in FY09.

The changes mean Credit Suisse is now forecasting earnings per share (EPS) of 50.8c in FY10 and 57.6c in FY11, which compares to Macquarie at 47.9c and 51.3c respectively. Consensus EPS forecasts according to the FNArena database stand at 52.5c and 57.8c for FY10 and FY11. What has Credit Suisse more positive is its view the current decline in Taxi Service fees is due to cyclical factors rather than structural ones, meaning a recovery can be expected when economic conditions improve.

This sees Credit Suisse retain its Neutral rating on the stock, while Macquarie takes the view the downside risk to earnings means share price upside is unlikely, so to reflect this it rates Cabcharge as Underperform. Overall the FNArena database shows a total of three Buys, one Accumulate, two Holds and three Sell ratings, with JP Morgan one of those with a Sell rating given its view changes to the business model will be needed to deal with technology changes in the industry in coming years.

In contrast, Deutsche Bank rates Cabcharge as a Buy, arguing while the ACCC issue is overhanging the share price at present the market is factoring in an overly bearish outcome, meaning there is value in Cabcharge at current levels. The broker's $6.80 price target reflects this, as the shares closed last week at a discount to this target.

The database shows an average price target of $6.53, while UBS has the most aggressive target on the stock at $8.30 dating back to its results review in August. Macquarie has the lowest target price of $5.62. Shares in Cabcharge today are higher and as at 2.30p the stock was up 10c at $6.37, which compares to a range over the past 12 months of $4.71 to $7.14.

The Overnight Report: Wall Street Snaps 5-day Winning Streak

By Andrew Nelson

On the eighth anniversary of the September 11, 2001 terror attacks, the Dow ended down 22 points or 0.23%, while the S&P 500 closed 0.14% lower and the Nasdaq slid 0.15%.

Stocks slipped on Wall Street, snapping a five-day winning streak and pulling the major gauges down from their previous 2009 highs. Falling oil prices put the pinch on the big energy stocks, while commodities stocks and their underlying products were also weaker as investors looked to book some profits.

The Dow rose 1.7% on the week, and is up 9.5% for the year to date. The S&P 500 was up by 2.6% this week and the Nasdaq rose 3.1% on the week. All three have risen in three of the last four weeks and seven of the last nine.

Stocks did manage to post some slim gains up to around midday on the back of FedEx's upbeat profit forecast and a jump in consumer sentiment, but the gains were shaky. As shares began to slip, gold advanced, hitting a seven-month high above US$1,006 an ounce as investors started to look in earnest for a hedge against the US dollar's slide. The move marked gold's fourth straight week of gains.

Conversely, the US dollar fell for a fourth session, with the euro rising to US$1.4634 earlier in the session, its highest level since last September. The Aussie and yen were also stronger, sitting at or close to multi-month highs against the greenback. All up, the dollar index lost 0.2%.

One could have assumed this trend would have been a positive across the entire commodities space given dollar-traded commodity prices have been rising of late on the weak greenback on bets of a global economic recovery. But this just wasn't the case today.

Crude prices started to slip as soon as stocks lost momentum mid-morning. October crude futures fell US$2.65, or 3.7%, to US$69.29 after hitting a two-week high earlier in the day of $72.90/bbl. It was the first session in five that oil retreated. News from China that industrial output rose 12.3% on the year in August failed to provide support.

However, there was other news from China, news that showed crude imports by the world's second largest user of oil had dropped from July's record high.

Not helping matters was yesterday's report for the US government's Energy Information Administration, which said demand for gasoline and other petroleum products fell last week, resulting in a big build-up in fuel inventories. Gasoline demand actually fell 2.1% from the prior week.

Elsewhere in commodities, base metals were choppy at best, with most contracts ending lower. Although there were periods in the day where prices moved up, they lacked the sustainability that has been seen in the preceding weeks.

News from FedEx did help stocks off to a positive start after the package delivery firm, which is often seen as a proxy for the economy, lifted its fiscal first and second-quarter earnings forecasts due to cost cutting and stronger international shipments. The company upgraded its 1Q EPS forecasts to US58c versus its earlier forecast for a profit of US44c and now expects to earn between US65c to US95c per share in the second quarter versus its earlier prediction of US70c. Shares shot up more than 5%.

Financials were also back in the spotlight after Treasury Secretary Timothy Geithner said the US government is keen to get rid of its stakes in financial institutions, but will be careful to not do so too soon.

Transportation stocks, which many expect will be among the first to benefit as the economy recovers, were also stronger. The Dow Jones Transportation Average gained 2% helped by the push from FedEx shares and the falling oil price.

That said, the drop in crude did little to help Dow components Exxon Mobil and Chevron, which were down about 1% each. All up, 21 of 30 Dow issues ended lower, with other big losers including IBM, Hewlett-Packard and Procter & Gamble.

On the economic front, the University of Michigan's initial reading on consumer sentiment rose to 70.2 in September from 65.7 in late August. The read was the highest reading since June and easily topped expectations.

However, the report also showed that only 16% of consumers said their finances had improved and this was the worst percentage since the university first asked the question in 1946. Also, only 25% of consumers said they expected income gains over the next year, which leads one to think that if positive top-line consumer sentiment reads are going to provide a boost, it's only going to be after there is meaningful evidence of a recovery in the US labour market.

In other economic news, the US Commerce Department reported that wholesale inventories fell 1.4% in July after falling a revised 2.1% in June. This was the 11th consecutive month inventories dropped and the read was well short of analyst expectations. On top of that import prices rose 2% versus forecasts for a rise of 1%, while the August Treasury budget showed the deficit grew by US$111.4bn in August versus forecasts for a deficit of $139.5bn.

Markets around the rest of the globe were mostly higher, with many indices hitting 11-month highs. The FTSE 100, France's CAC 40 and Germany's DAX all gained, while Asian markets excluding the Nikkei, were also higher yesterday.

Overnight in Sydney, the SPI was down 4 points at 4594, with investors taking stock of a rising Aussie and commodities prices that are otherwise softening despite the falling US dollar.

Virgin On The Ridiculous?

By Chris Shaw

A weak economy is a tough operating environment for an airline and Virgin Blue ((VBA)) is no exception as its fledgling international operation in particular records losses as it attempts to build up its competitive position, while the domestic operations are dealing with a weaker demand environment.

To strengthen its financial position the group has announced an equity raising to generate $231 million via shares issued at $0.20, the immediate impact being a reduction in broker earnings per share forecasts as they factor in the dilutionary impact of the more than one billion new shares to be issued.

According to Bank of America-Merrill Lynch, the capital raising makes sense as while the company has around $475 million in cash on its balance sheet it can only access around $170 million of this as the rest is linked to credit card merchants and aircraft lessors.

By raising the additional funds the broker sees the group as increasing its room for error in the event the economy again turns down or it has to deal with other possible outcomes such as ongoing price wars with competitors or a further outbreak of swine flu.

Along with the capital raising the company has provided earnings guidance indicating a break-even result in FY10 in net profit terms, with cash flows for the year expected to be positive. Here is where it gets interesting among analysts, as there are some significantly different views as to exactly what this implies.

According to UBS the new guidance for FY10 is conservative as the broker is forecasting a net profit next year of around $40 million, which is based on expectations of lower fuel prices and given recent signs of a possible bottoming in the domestic market. Given such an outlook the broker retains its Buy rating, though it concedes the company remains hostage to its economic environment at present.

In contrast Deutsche Bank argues the capital raising is an indication the group's earnings outlook remains uncertain as the move to raise additional cash suggests management is concerned operating conditions could deteriorate further. Its argument is supported by management comments it intends to try to raise a further $200 million through asset sales and lease-backs. Given these concerns the broker is happy to stick with its Hold rating.

This is matched by RBS Australia as it too sees the current economic environment as being difficult enough that there are no obvious positive catalysts for the stock, especially as while the domestic operations are putting in a credible performance there are still a number of challenges for the international operations.

Currently the broker is factoring in a recovery to modestly positive earnings in FY11 after break-even in FY10, forecasting EPS of 2.1c for the latter year while conceding there are risks to its numbers from the potential of higher oil prices by that time.

The broker continues to prefer the stock to Qantas ((QAN)) but the existence of earnings risk is preventing it from turning more positive. Other brokers have similar estimates for FY11, with UBS and Deutsche Bank forecasting EPS of 3.0c, the latter cutting its estimate from 9c previously.

BA-Merrill Lynch expects FY11 EPS of 10c and sees the update on the FY10 earnings outlook as reducing market concerns about the company's financial and operation position, esepcially as it implies no further improvement in operating conditions despite evidence over the past couple of months of an increase in loads on V Australia in particular.

Macquarie is also positive and has upgraded the stock to a Buy given it sees greater upside to FY10 earnings than does management. The broker is urging shareholders to take up the rights at $0.20 if possible, seeing the stock as very good value at that level.

The majority of those covering the stock agree as the FNArena database shows Virgin Blue is rated as Buy five times and Hold three times, with an average price target of $0.50, down from $0.56 reflecting the dilution to earnings from the new shares being issued.

Shares in Virgin Blue today remain in a trading halt pending the completion of the equity issue.

A More Favourable Risk-Reward Balance For Qantas

By Chris Shaw

First it was higher oil prices and then lower demand as the past 12 months or so have marked a tough time for Qantas ((QAN)), particularly as these themes have played out at a time when competition in the airline's marketplace has been intensifying.

Macquarie takes the view much of this is now priced into the stock and so the broker has upgraded to a Neutral rating from Underperform previously, arguing the group's outlook is actually showing some signs of improvement and the earnings impact of lower yields is now being appropriately recognised.

The broker takes the view the recent improvement in measures such as business sentiment and some consumer numbers is likely to create a gradual lift in demand for Qantas's services. This will flow through to improved earnings but only slowly in the broker's opinion given excess capacity remains on a number of the Flying Kangaroos' international routes.

The airline also recently announced the deferral of some aircraft orders and this plus an enhanced frequent flyer program has strengthened the group's balance sheet on the broker's analysis, while with free cash flow likely to return to positive levels in FY10 there is an increased chance of a dividend being paid, something the broker currently hasn't penciled in.

There is also scope for Qantas to lock in a greater portion of its FY10 oil requirements at lower prices given the oil price looks to be weakening. The broker sees this as another potential positive for earnings. To reflect these factors Macquarie has lifted its earnings per share (EPS) forecast for FY09 by 8.8% to 3.7c, with an increase to 4.7c forecast in FY10 and to 13.2c in FY11.

By way of comparison, the FNArena database shows consensus EPS forecasts of 6.8c this year and 13.6c in FY10, which suggests Macquarie may still be too conservative with its numbers. Bank of America Merrill Lynch is one of those more bullish as its EPS forecasts are currently 5.1c this year, 20.2c in FY10 and 23.4c in FY11.

The broker suggests the entry of Tiger Airlines into the Sydney-Melbourne market will actually have a minimal impact on earnings of about 2% as Tiger is chasing price sensitive passengers and not the schedule sensitive passengers on which Qantas makes higher yields.

As well the broker points out Qantas' budget airliner Jetstar is offering more flights at lower prices than Tiger anyway and even allowing for this Qantas group is still generating a solid yield advantage over the likes of Tiger. BA-ML sees nothing in the move to cause significant concern for Qantas.

Based on its earnings forecasts the broker has a $2.15 price target on Qantas, while the average target according to the FNArena database is $2.23. Given the stock is trading around 30c below that level there is enough value to justify a Buy rating on BA-Merrill Lynch's view, while the database shows a total of five Buys, four Holds and one Sell.

The latter comes from RBS Australia, which argues tickets pricing remains weak and is likely to remain so for some time, which would keep earnings under pressure. As well, recent updates to the broker's oil price and Australian dollar forecasts meant minor downward revisions to earnings forecasts, supporting its negative view.

Shares in Qantas today are slightly higher and as at 12.00pm the stock was up 3.5c at $1.885. This compares to a trading range over the past year of $1.38 to $3.75.

Brokers Relatively Unmoved As Qantas Slashes Guidance

By Chris Shaw

Having previously guided to full year earnings for FY09 of around $500 million, Qantas ((QAN)) yesterday revised this number to something between $100-$200 million, giving as reasons an unprecedented fall in demand for its international services in particular and an associated fall in yields on operations.

Post the news stockbrokers in Australia have been busy scaling down their previous earnings estimates, with for example RBS Australia cutting its FY09 and FY10 numbers by 73% and 52% respectively, UBS lowering its forecasts by 75% and 44% for the same periods and Macquarie taking 80% off its estimates for both years.

According to the FNArena database consensus earnings per share (EPS) forecasts for the company now stand at 7.9c this year and 16c in FY10, down from closer to 17c and better than 20c respectively prior to the announcement. The target share price impact has been somewhat more muted however, the database showing the average price target for Qantas shares has fallen to $2.11 now from $2.33 prior to the update.

The most surprising thing given the magnitude of the earnings downgrade has been the lack of ratings downgrades as only RBA Australia has revised its view, moving to a Sell recommendation from Hold previously. This puts the broker in the position of being the only one in the FNArena database to recommend being out of the stock, arguing the share price rally (the stock actually closed higher yesterday despite the revision to earnings expectations) is not sustainable in the face of the downgrades to forecasts flowing through as a result of management's revision to guidance.

As well, the broker points out there are no signs operating conditions for the company are going to get better anytime soon, meaning while the stock looks relatively cheap given at current price levels it is trading at less than book value, there are no catalysts that will see this value realised.

Citi in contrast is sticking with its Buy rating post the update as it too sees value in the stock, albeit on a longer-term timeframe. Similarly, Bank of America-Merrill Lynch rates the stock as a Buy, taking the view management is clearing the decks with this announcement and this will help restore profitability in coming years.

As well the broker points out the company is undertaking an aggressive cost cutting approach via a reduction in staff numbers and delays to new plane orders and along with its strong balance sheet this means the company is well placed to recover as demand improves. On UBS estimates this could be in 2010, which supports another Buy rating.

Macquarie recognises the same value in the stock but is taking a position between the two extremes, pointing out while a re-rating must eventually occur, this rerating could take some time and this means a Neutral rating is most appropriate at present. This is the same argument as JP Morgan presented in its latest review of the company.

Overall the FNArena database shows a total of three Buys, five Holds, one Reduce and one Sell recommendation. Shares in Qantas today are slightly weaker in early trading and as at 10.50am the stock was down 7.5c or 3.8% at $1.925. This compares to a range over the past year of $1.38 to $3.75.

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