Origin Energy (ORG)
An energy retailer, but also a power generator, gas producer and explorer. It’s been an excellent sharemarket performer since splitting from Boral in 1991. It offers a bright future after selling half its coal seam gas assets for US$5 billion to US based ConocoPhillips in a joint venture deal. Origin is also fundamentally sound.
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Despite its exclusion from the National Broadband Network short list, Telstra remains on track to deliver free cash flow of between $6 billion-to-$7 billion by 2010. Telstra, a defensive stock, should perform well, irrespective of the economic environment. Its attractive fully-franked dividend yield compares favourably to interest on term deposits.
Leighton Holdings (LEI)
This project stgelopment and contracting group recently announced a significant profit downgrade after writing down the value of its shares in a number of toll roads and other companies. However, Leighton advised it was satisfied with the performance of the group’s operating companies. Work in hand actually increased between the September and December quarters. Also, it expects to maintain its dividend in the coming year. Continue holding for now.
The supermarket giant continues to perform well in a slowing economy. Recent company statements have been upbeat. Expect an increase in net profit after tax of between 9 per cent and 12 per cent this financial year. A “safe haven” stock in a world of gloom.
The past few years have been tough for this building materials company, with a decline in residential building activity. Future profit growth will be under pressure until the economy improves. Move on.
Seven Network (SEV)
Advertising revenue, the bread and butter of media companies, has suffered in line with a slowing economy. And, the economic outlook suggests advertising revenue will remain under pressure, at least in the short term. Better opportunities exist elsewhere.
Australian Securities Exchange (ASX)
What a strong business – it generates fees from every transaction on the ASX. As a virtual monopoly, it’s one of the most profitable businesses in Australia. If you want leverage to an improving Australian equity market, then it’s hard to go past the ASX.
The Reject Shop (TRS)
This discount variety retailer has grown its network to more than160 stores. Strong management knows how to identify and stock high turnover products. The strategy is to expand its retail presence across Australia, enhancing operating efficiencies with scale.
GUD Holdings (GUD)
GUD sources and manufactures a wide range of household goods, such as Sunbeam appliances, Davey water pumps and Spa-Quip spa pumps. Management has increasingly switched from domestic manufacturing to low-cost offshore sourcing, while enhancing and leveraging brand strength. Organic growth is now marginal. The majority of shareholder returns are now in the form of dividends.
CSR is involved in sugar, aluminium, building products and property sales. Diverse activities help smooth cash flows. Each division is exposed to its own cyclical forces. Cash flows are improving now a number of growth projects will soon be completed. A break-up is probable at some stage, but unlikely in the current market.
Emeco Holdings (EHL)
EHL holds leading positions in earthmoving equipment markets in Australia and Indonesia. The focus is on mining and, to a lesser extent, civil construction. This stock is highly cyclical, suitable only for investors with an appetite for risk. Expect earnings to be hit by the resources downturn.
This paint manufacturer is highly leveraged to housing conditions. Management has done well to reduce the cost base, but the business remains highly cyclical. Most costs are fixed. Rises or falls in revenues are exaggerated on the bottom line. Competition is fierce, including from imports.
Straits Resources (SRL)
A diversified resources producer with interests in gold, copper, and coal. Earnings are expected to fall from last year’s peak, but this has been mostly factored in as the share price has dropped from a year high of $8.55 to $1.07 in early trading on January 16. Current market capitalisation of about $266 million doesn’t come close to reflecting its asset value. Straits Resources intends to sell its 47.5 per cent stake in Singapore-listed Straits Asia Resources, which, at today’s price, is valued at about $460million.
Tabcorp Holdings (TAH)
The stock has suffered in response to losing Victorian gaming licences from 2012. But I believe it’s been over sold given gaming earnings only represent 29 per cent of total revenues. Trading below $7 on January 16, Tabcorp offers appealing long-term value. Entrenched wagering, gaming and casino operations provide a defensive earnings stream. Dividend yield is likely to be an unusually high 13.5 per cent this year. But yield will fall on a rising share price. Gambling stocks are inherently defensive cash flow plays, even when government policy generates uncertainty.
Harvey Norman (HVN)
Its proven business model drives individual store performance. Harvey Norman is well-managed and strategically sound. But a slowing sector presents significant challenges as retailers struggle to sell stock and protect margins. Those who own the stock, continue holding. But I would not be buying until retail conditions improve.
Defensive earnings and an attractive dividend yield make Telstra worth holding until this bear market shows signs of a recovery. But that’s some time off. A fully-franked dividend yield of 8 per cent is a solid return. Hold until better opportunities arise.
Equinox Minerals (EQN)
Alarm bells are ringing for this mid-sized copper producer. Recently, offtake partner Glencore claimed the Lumwana (copper concentrate) project in Zambia has not met contract specifications. While Equinox has re-directed Glencore deliveries to other international traders, this is a concern. Add the bearish state of the copper market and US$525million in company debt, it’s best to avoid Equinox at this point.
Current consensus forecasts appear overly optimistic in an environment where market volumes and merger and acquisition activity are dwindling at cyclical lows. Potential exists for earnings to disappoint in the approaching reporting season. Uncertainty as to when global markets may recover is also behind our sell recommendation.