Wesfarmers or Woolworths. Woodside Petroleum or Santos. These stocks are highly regarded and sit in many portfolios. Even owing a parcel of each is widely considered a sound long-term investment.

Richard Batt, of Shadforth Financial Group, gives his reasons as to why he prefers a group of six companies over their competitors. He argues why his choice of companies offer good prospects and share price upside going forward. Mindful of instability and subdued growth in the US and Europe, Batt offers a diverse list, saying an astute strategy in uncertain times is to create a balanced portfolio of growth and defensive stocks.   

Atlas Iron (AGO)


Chart: Share price over the year to 17/06/2011 versus ASX200 (XJO)

Australia is among the world’s largest exporters of iron ore. The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) forecasts Australian iron ore exports to increase by 5.5 per cent to 425 million tonnes in 2011 as steel consumption in stgeloping economies, particularly Asia, grows.

In response, Batt says Atlas Iron’s share price is up about 20 per cent since January, and the company recently reported a maiden net profit of $30.1 million for the half year to December 31, 2010.

Batt prefers Atlas Iron to another pure iron ore play Fortescue Metals Group, because it’s coming off a lower base and offers more potential to surprise on the upside. Fortescue’s share price at June 15, 2011 was down about 3.5 per cent this calendar year.

He says Atlas Iron’s solid business generates strong cash flows. Operating cash flow of $120 million in the March quarter lifted net cash to about $300 million. Batt expects the company’s financial performance in the second half to be significantly stronger from increasing sales volumes, higher iron ore prices and reducing operating costs.

Blackmores Limited (BKL)


Chart: Share price over the year to 17/06/2011 versus ASX200 (XJO) 

Vitamin and supplement industry leader Blackmores is stgeloping its business in Asia by launching new products and creating distribution channels. “Asia protects the business from the impact of any individual market challenge,” Batt says. “This strategy is proving a success, with Asian sales up 37 per cent this financial year and 61 per cent in the third quarter.”

Comparatively, Batt says same sector companies Australian Pharmaceutical Industries and Sigma Pharmaceuticals are finding current market conditions difficult. “Blackmores management has an established reputation, and the company’s well positioned to benefit from an ageing population and health-conscious consumers,” he says. “It provides growth potential and a solid fully franked dividend.” 

NRW Holdings (NWH)


Chart: Share price over the year to 17/06/2011 versus ASX200 (XJO) 

NRW Holdings provides contract civil and mining services to the iron ore sector. The company recently delivered a strong first half result from a solid performance in its civil, mining, drilling and blasting divisions. Revenue increased 30 per cent, resulting in a 31 per cent increase in net profit to $20.4 million. Batt says the balance sheet is reasonably strong, with a cash balance of $40.9 million and net debt of $14.9 million at December 31, 2010.

Batt argues that NRW Holdings potentially offers much more upside than engineering services giant Leighton Holdings, which will undertake a major review of its operations. Leighton announced it expects to report a loss of $427 million for the financial year versus previous profit guidance of $480 million after tax.

Batt says NRW Holdings recently won a $158 million civil and mining contract in Western Australia’s Pilbara region. “This contract win builds on strengths in the Pilbara,” he says. “It follows recent success breaking into the Queensland coal market after winning a $50 million contract at the Middlemount Coal Project. Although the contract value is relatively small, it shows the company is moving away from its dependence on WA iron ore. It’s endeavouring to broaden its industry and geographic diversity, which should benefit long term investors.”

QBE Insurance (QBE)


Chart: Share price over the year to 17/06/2011 versus ASX200 (XJO) 

Low interest rates, subdued equities markets, more natural disasters and a strong Australian dollar are making life difficult for insurers. QBE’s 2010 net profit after tax of $US1.28 billion was down 17 per cent on the previous year and Insurance Australia Group was down 51 per cent to $161 million.

Batt says while IAG benefitted from a strong underlying performance in its Australian and New Zealand businesses, the UK operations hurt the result. “This is why we believe QBE is better positioned to benefit when conditions improve,” he says. “Rising interest rates in the medium term should improve QBE’s profitability. The strong management team and a robust balance sheet make QBE well positioned to pursue opportunities. Until IAG sort out its UK operations, we prefer QBE.” 

Wesfarmers (WES)


Chart: Share price over the year to 17/06/2011 versus ASX200 (XJO) 

Batt prefers Wesfarmers to Woolworths. He says the Coles turnaround is gathering pace as shown by the company’s latest third quarter results. Coles food and liquor sales were $5.852 billion, up 7.1 per cent on the previous corresponding period. For the year to date, food and liquor sales were up 6.6 per cent to $18.845 billion.

At Woolworths, Australian food and liquor sales for the third quarter were $9.157 billion, representing a 4.6 per cent statutory increase on last year’s third quarter. Batt says increasing competition from Coles has the potential to lower operating margins at Woolworths.

He says Wesfarmers appeals because of its diverse businesses, which also include coal, chemicals, fertiliser, insurance and industrial and safety. “The company’s strength lies in multiple income sources,” he says. “While Woolworths has an enviable track record of well above average earnings per share and dividend growth, Wesfarmers appears to be a potentially stronger growth story.”

Woodside Petroleum (WPL)


Chart: Share price over the year to 17/06/2011 versus ASX200 (XJO) 

Batt says the energy sector potentially provides steep upside in the next 12 months year as more projects come on line and further investment continues to flow into the sector. Woodside Petroleum is an ideal exposure as its operations encompass crude oil, LPG and LNG. Woodside produces about 40 per cent of Australia’s oil and gas and plans to become a global LNG leader by 2015. Sales revenue of $US4.193 billion in 2010 represented a 20 per cent increase on 2009. Company NPAT was up 6.9 per cent to $US1.575 billion.

Batt says other strong and competitive companies in the sector include Santos and Oil Search. But Batt has sovereign risk concerns regarding Oil Search’s Papua New Guinea operations, and he says Santos has little to show for vast sums spent on high-risk exploration targets. Recent flooding in the Cooper Basin affected production.

Atlas Iron  (AGO) $3.53
Blackmores Limited  (BKL)  $28.03
NRW Holdings (NWH) $2.65 
QBE Insurance   (QBE)  $16.71
Wesfarmers  (WES) $31.46
Woodside Petroleum  (WPL) $40.80

Price current to market close, 15 June 2011

>>Back to the newsletter to view other articles – June 19th 2011


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