The effects of the global financial crisis are still playing havoc with financial markets, according to analysts. Morningstar’s Andrew Doherty says a weaker Australian equities market is a response to investor concerns over high US and European government debt and budget deficits.
In the US, stubbornly high unemployment and weak housing is crimping consumer spending. Slowing emerging markets add to concerns, as these have been the key source of world growth.
“Sharemarket volatility goes hand-in-hand with investing,” Doherty says. “Current global concerns will pass, but others will follow. And a return to bull market conditions will occur. Portfolios with a focus on quality companies with robust earnings streams and balance sheets are better placed to withstand the market downturns and support returns over the long term.”
Doherty and State One Stockbroking’s John Rawicki have put together a list of companies offering strong market positions and are less likely to be buffeted by short-term market movements.
Doherty says the success of industrial conglomerate Wesfarmers can be attributed to a diverse range of businesses with strong positions in their markets. The largest contributors are supermarket retailing, hardware and coal, he says. Diverse revenue sources smooth the earnings stream. “The greatly challenging turnaround of Coles supermarkets is well underway with margins improving substantially in recent periods,” he says. “Management is highly regarded with a keen focus on driving cash flow from each business.” The company’s eight divisions generate combined revenue of more than $50 billion a year.
Hearing implants maker Cochlear is a “true Australian success story”, according to Doherty. “It’s always had a focus on innovation, which sees between 15 and 20 per cent of revenue ploughed into research and stgelopment each year,” he says. “This has led to stgeloping products that are considered the most reliable and functional in the market.” Doherty says Cochlear has benefited from first mover advantage and competitors haven’t come close to catching it. The high degree of earnings outside Australia means currency fluctuations can negatively impact the bottom line. “Still, on-going earnings growth is supported by expanding in Asia, the US and Europe, the roll out of new products and minimal impact from current economic conditions,” he says. Cochlear generated total revenue of $734.8 million in 2010.
Coca-Cola Amatil (CCL)
Defensive company and soft drink bottler Coca-Cola Amatil is largely cushioned from challenging economic conditions. But Doherty says revenues also grow as new products, including ready to drinks (RTDs) and premium beer, are added to the chain relatively cheaply. He says healthy margins enable cash flows to comfortably exceed substantial capital requirements, and brand power supports price increases over time. He says Indonesia adds an additional growth stream. “Solid and growing fully franked dividends are set to continue,” he says. Doherty says Coca-Cola Amatil offers scale advantages flowing from its extensive distribution network. In 2010, Coca-Cola Amatil posted a record NPAT (net profit after tax) of $506.6 million.
Rawicki says volatile share prices have become “part of the furniture” in equity markets since the global financial crisis struck in 2008. “Defensive stocks with diversified business models and consistent historical earnings provide the best way to ride out the storm,” he says. Rawicki has chosen a stable diversified property group, a large integrated energy company and a global healthcare stock to “deliver capital growth over the next 12 months, while withstanding overall market turmoil better than the rest”.
Lend Lease Group (LLC)
Vertically integrated property company Lend Lease Group owns and stgelops shopping centres and residential housing. It’s involved in property management services, construction (through the Bovis Lend Lease brand) and investment management. Rawicki says its geographic coverage is diverse, although most of its earnings are still sourced from Australia. He says an “overdue rebound” in the US and UK property markets would boost Lend Lease’s bottom line. “This company’s strong balance sheet has enabled it it to ride out the darkest days of the GFC, while capitalising on a spate of opportune acquisitions,” he says. “Low gearing, strong financials and an undemanding price/earnings ratio make Lend Lease a solid investment for those seeking growth with low-to-moderate risk.” Lend Lease delivered an operating profit after tax of $220.2 million for the half year to December 31, 2010, representing a 17.2 per cent increase on the prior period.
AGL Energy (AGK)
Rawicki says AGL supplies 3.2 million Australians with electricity, gas and dual fuel energy, making it the biggest retail energy supplier in the country. Strong growth is expected from within the retail and power generation businesses. The upstream gas portfolio should deliver above average shareholder returns over the medium term. “Complementing its traditional thermal generation, AGL has a significant investment in renewable energy assets, such as hydro, wind and coal seam gas, placing it in pole position for a carbon-conscious world,” Rawicki says. “Expect revenue growth to be about 8 per cent. Risks to revenue remain low given the inelastic nature of electricity demand.” Half-year revenue to December 31, 2010 was up 9 per cent to $3.488 billion, but underlying NPAT slipped 3.7 per cent to $226.2 million.
CSL Limited (CSL)
Australian biopharmaceutical products maker CSL operates in 27 countries, including the US, Switzerland and Germany. Rawicki says CSL’s human papillomavirus (HPV) vaccine adds another earnings stream to supplement its existing royalty revenue from Merck’s Gardasil and GlaxoSmithKline’s Cervarix. “With an exemplary and vertically integrated business model, CSL has conquered the high barriers to entry and resides in a strong competitive position,” he says. “CSL holds a suite of valuable patents that generate strong cash flows, further bolstering its balance sheet and placing it an enviable financial position.” Sales revenue of $2.1 billion for the half year to December 31, 2010, was up 7 per cent on an underlying basis compared to the previous corresponding period.
|COMPANY||CODE||SHARE PRICE CLOSE|
|Lend Lease Group||(LLC)||$8.86|
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Price current to market close, 29 July 2011
Charts: Share price over the year to 29/07/2011 versus ASX200 (XJO)
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