Australia | Feb 23 2009
By Chris Shaw
Ongoing weakness in the US market in particular saw Billabong ((BBG)) deliver a result a little below market expectations for the first half, this being tempered by management reiterating full year guidance of 6-10% growth in earnings per share (EPS) terms.
The problem, according to ABN Amro, is after adjusting for currency assumptions this guidance is a de facto downgrade to earnings expectations, especially given the result showed an increase in inventory levels and a significant fall in margins in Billabong’s US operations. This implies further downside risk. In the broker’s view it also adds to the group’s lack of earnings visibility at present.
The stockbroker estimates the group’s cost of goods sold is also increasing at the same time as it has substantial inventory to get rid of. This, says ABN Amro, suggests the current earnings pressure is likely to continue into 2010. To reflect this ABN Amro has cut its earnings estimates and in EPS terms now expects 79.5c this year and 80c in FY10.
The broker also suggests others in the market will follow suit in terms of cutting estimates and as a result it has placed a short-term Sell rating on the stock. iits longer-term recommendation remains unchanged at Hold given the value on offer.
Macquarie is nowhere near as negative and retains its Outperform rating post the result, pointing out while the company is experiencing earnings pressure and this could continue for another year or so the latest result shows it continues to do better than its rivals. Given this apparent strength of its brands, the broker remains positive from a longer-term perspective.
Citi has also turned more positive and upgraded to a Buy rating on valuation grounds, the broker pointing out the current share price indicates the stock is trading at around a 40% discount to the market when on its numbers a 15-20% discount would be more appropriate.
While admitting its upgrade comes early in the cycle given there are as yet no signs of any improvement in conditions, the broker sees the move as justified given the share price is factoring in much of the potential earnings risk at current levels.
Credit Suisse matched Citi’s move and also upgraded the stock on valuation grounds, suggesting the result was actually a reasonable one as the risk was it came in even lower given current weak trading conditions. A possible source of upside to earnings going forward is via acquisitions, as the tough market conditions and the fact the group is doing better than its peers is likely to create opportunities for the company in the broker’s view.
Bank of America-Merrill Lynch doesn’t agree however, suggesting the rapid pace of acquisition by the company in recent years is hurting earnings performance now as cash flows and balance sheet strength have become an issue on the back of higher working capital requirements.
Post the result the broker has trimmed its forecasts and now expects EPS of 87c this year and 92.4c in FY10, which flows through to a reduction in price target to $6.00 from $7.40 previously. The FNArena database shows consensus EPS estimates of 86.7c and 91.5c respectively, while the average price target according to the database is $8.37, down from $9.36 prior to the result.
Along with Bank of America-Merrill Lynch a similar target is offered by ABN Amro at $6.25, down from $8.47 previously, while Credit Suisse leads the way with its $9.57 target. The database now shows a total of four Buys, one Accumulate, four Holds and one Sell, along with ABN Amro’s short-term Sell.
Shares in Billabong today are stronger despite a weak overall market and as at 1.35pm the stock was up 25c or 4% at 6.57. Over the past year the shares have traded between $$6.09 and $14.16.