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The US downgrade, ongoing European debt problems, a bleak outlook for the UK and poor local data all contributed to a terrible two weeks for Aussie investors. The ASX200 ended 9.35% lower (it has dropped 16% over the past four months), with worse falls for megaminers BHP and Rio, down 12% and 13% respectively.

Even traditionally defensive stocks that should shine in troubled times like Woolworths were sold off, with the retailer dropping 7.47% over the past fortnight. Meanwhile Woodside slipped to $37, making it a potential takeover target for BHP once again.

According to brokers, the market dip makes the following blue chips even more attractive.

Company Stock code
Current share price
Share price July 22nd % Change
Woolworths WOW $25.76 $27.84 -7.47%
Rio Tinto RIO $71.52 $82.50 -13.31%
BHP Billiton BHP $38.21 $43.43 -12.02%
Woodside WPL $37.05 $39.80 -6.91%

1. Woolworths

Broker buys:

UBS, Credit Suisse, Shadforth Financial Group, RBS Morgans, Morningstar, William Shaw Securities, Deutsche

Closing price
$25.76
% change since July 22
-7.47%

CHART

Roger Leaning, Head of Research, RBS Morgans

Despite the GFC impact, Leaning says the PE contraction is unwarranted. WOW is traditionally considered a core defensive holding of most portfolios based on a solid, reliable and predictable dividend reflecting its staple cash flows. But Leaning says investors should note that WOW is also offering 6.5 per cent EPS growth this year and in excess of 10 per cent annually over the next two years. He says an inspection of its performance over the past five years highlights a decreasing PE ratio, despite an increasing EBIT margin. With sellers running out of steam, he says the downtrend from the October 2010 high is set to reverse. From a technical perspective WOW is Leaning’s top call which he says represents the best value defensive play suitable for all portfolios. “We believe that the stock has been building a base over the past few months and that is heading higher from here,” says Leaning. ”The potential long-term upside price target is $30.00.”

Shawn Uldridge, of William Shaw Securities

Uldridge says Woolworths isn’t the cheapest stock at 14.6 times earnings and an historical 4.35 per cent dividend yield, but at $25.76 levels it’s trading at the lower end of its range. “The chances that such a consumer staple comes under any serious pressure are remote,” Uldridge says. “We like Woolworths, because the duopoly position it enjoys in supermarkets make it a steady earner, and the barriers to entry are huge.” Also, Woolworths offers multiple earnings streams from liquor shops, hotels, consumer electronics and fuel. Uldridge says Woolworths at $27.40 levels is a good entry point for a company offering a lot of upside capital growth potential.

Andrew Inglis, Shadforth Financial Group

Inglis believes that in the event of a continuing downturn in the sharemarket, Woolworths appears reasonably priced with a dividend yield of 5 per cent and the possibility of further share buy backs. “Its mainly defensive business has already proven it can ride out a GFC,” he says.

Cleo Nanni, Novus Capital

Nanni has a hold on one of Australia’s most successful and consistent retailers. “Clever marketing campaigns, such as the “Fresh Food People”, has contributed to its success,” he says. “My price target is $30…hold for that level.”

2. Rio Tinto

Broker buys:

Merrill Lynch (PT $110.00), RBS (PT $96.00), Perpetual, BT, Goldman Sachs, Alpha Broking, Pengana Capital Managers, Investorfirst (Valuation $97.66), Atom Funds Management

Closing price
$71.52
% change since July 22
-13.31%

CHART

RBS Morgans – Nicholas Brooks, Paul Shepherd, Roger Leaning

Brooks says that the cash generation in the megaminer is so huge that when the reporting season starts in August, Rio should be completely ungeared. “All divisions are expected to report quality results, and with Rio currently trading at a discount to rival BHP, we expect that gap to close in the short term,” he says. Shephard also believes that the global miner is offering rare value, trading at a discount of over 40 per cent to his valuation and target price. “It’s undertaking an aggressive organic expansion plan that should underpin significant production growth,” he says. “We also see opportunities to increase capital management in the medium term, a key positive catalyst.”

Head of research with RBS, Roger Leaning remains overweight resources, but also favours diversified large caps, especially those with robust cash flow and low-cost operations exposed to infrastructure commodities like iron ore, copper and coal. As Australia’s ‘proxy diversified’, Leaning says it is often overlooked that BHP is also the country’s largest listed oil producer – nevertheless, he says Rio Tinto still makes for better exposure at current levels.

Cleo Nanni, Novus Capital

Nanni believes that current price action indicates a strong buying opportunity, particularly below $80. “Hold and consider accumulating while a good opportunity exists,” he says.

Les Szancer, Alpha Broking

Szancer lists Rio Tinto a hold, but not because he has gone bearish on commodities. He says he is actually still mid-to-longer term bullish. “In the short term, however, the markets are having an issue with direction, so I wouldn’t be adding at the moment,” he says, saying: “Rio has been $160 a share and one day it will return to those lofty heights.”

George Sakellariou, Investorfirst Securities

Sakellariou says that consensus estimates for Rio Tinto reveal flat earnings growth beyond 2011, which translates into a discounted forecast price/earnings ratio of just 9 times calendar year 2011 earnings. “Rio is trading at a significant discount to our blended intrinsic valuation of $97.66,” says Sakellariou. “Improving momentum conditions should support a sharp rally…with initial resistance expected in the $86 region.”

Pengana Capital Managers portfolio manager Tim Schroeders

Schroeders expects large cap diversifieds like BHP Billiton (BHP) and Rio Tinto (RIO) to weather a protracted period of market correction better than some pure-plays or explorers moving into development phase. “Investors are likely to remain cynical about junior resource stocks until there’s greater clarity over where markets are heading,” says Schroeders.

3. Woodside Petroleum

Broker buys:

Investorfirst, Citi, Novus Capital, Wilson HTM, William Shaw Securities, Shadforth Financial Group

Closing price
$38.21
% change since July 22
-12.02%

CHART

Cleo Nanni, Novus Capital

Nanni points out that Australia’s premier oil and gas company is a proven performer, well managed and offering a strong balance sheet. “It’s suitable for conservative investors seeking oil and gas exposure for potentially standout long-term growth,” he says. He thinks that the recent volatile price provides a great buying opportunity. “We believe Woodside is a stand-out, long term growth opportunity for investors seeking oil and gas exposure,” he says. “Buy and hold.”

Peter Day, Wilson HTM

Day notes that further delays and cost increases at Woodside’s Pluto-1 project underline the challenges in delivering multi-billion dollar projects on schedule and on budget. The delays have led to a $900 million increase in capital expenditure, and total cost increases are 24 per cent above the original budget. “While the short term outlook is challenging, new chief executive Peter Coleman’s experience should help,” he says. “We believe there’s little value imputed for growth projects at these levels and retain our buy rating.”

Shawn Uldridge, William Shaw Securities

Uldridge says that LNG cost blowouts hit the share price hard, but longer term oil prices should increase and so will this company’s share price. “This year, the stock has been trading on a price/earnings multiple of about 20 times, but this hides the huge revenue growth WPL will generate over the next three years.” Woodside Petroleum has been in William Shaw Securities’ portfolio for a long time and Uldridge is impressed by the number of large LNG projects being developed and expanded by the company in Western Australia. “Increasing production from these projects in the next three years make Woodside an attractive long term buy and hold…buy on dips.”

Shadforth Financial Group – Richard Batt, Chris Elliott

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,” he says. “Woodside produces about 40 per cent of Australia’s oil and gas and plans to become a global LNG leader by 2015.”

Meanwhile Elliott notes that the stock has been on a rollercoaster over the past few months – recently Pluto project setbacks and jittery global markets have hurt the share price while several months ago the rumour mill was humming about a possible takeover of WPL. Elliott says that despite the cost blowout WPL is well managed and offers a strong balance sheet. “The company is suitable for conservative investors seeking oil and gas exposure,” he says.

George Sakellariou, Investorfirst Securities

Sakellariou is bullish about the crude oil price outlook, predicting a 20 per cent rise within the next year and up to 50 per cent within two years. Regarded by many as a core stock of any portfolio, Woodside operates the North-West-Shelf Project, which produces about 40 per cent of Australia’s oil and gas. It 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. Takeover speculation doesn’t seem to wane, but Sakellariou says this proven performer offers bright long term prospects. “We view Woodside as a low risk buying opportunity, with initial upside potential to $53, and between $65 and $70 within the next two years,” he says.

4. BHP Billiton

Broker buys:

William Shaw, Patersons, Perpetual, Armytage, Morningstar (PT $53.50), Atom Funds Management, RBS, Novus

Closing price
$37.05
% change since July 22
-6.91%

CHART

As is to be expected, plenty of brokers have buys on BHP, in fact it’s hard to find a bad word about the company beyond the word “hold”.

Shawn Uldridge, William Shaw Securities

Uldridge recently upgraded his recommendation on BHP from a hold to a buy. “The global miner’s share price has retreated due to a downturn in equity markets, a modest rise in the Australian dollar and a mild fall in commodity prices,” says Uldridge. “But with interest rates on hold given recent weak jobs numbers, we expect the Australian dollar to drift towards parity with the greenback in the medium term. This is positive for BHP, and the weaker share price offers an opportunity.”

Uldridge thinks that the world’s biggest miner still has plenty of growth left after posting a record half-year profit of $US10.52 billion for the six months to December 31, 2010, up 71.5 per cent on the previous corresponding period. Revenue was up 39 per cent to $US34.166 billion. For what the market widely considers a growth stock, BHP Billiton lifted its interim dividend 10 per cent to US46 cents a share and announced a $US10 billion buyback. A strong balance sheet enables flexibility as the company embarks on an $US80 billion investment program over the next five years. The company says major iron ore and metallurgical coal projects are at advanced stages of the approval process and this should result in a substantial increase in sanctioned project capital expenditure. Uldridge says BHP didn’t raise capital during the GFC and its $US10 billion buyback will be earnings accretive, while supporting the share price over the medium term. “Most importantly, BHP is trading on a forward EBITDA (earnings before interest, tax depreciation and amortisation) of just five times, so its share price could reach $55 sometime this year,” he says.

James Georges, Patersons Securities

Georges also has a buy on the mining giant, citing its balanced portfolio of world class, long life assets and a full suite of conventional energy products. “A stake should be part of any balanced portfolio,” says Georges. “The company has many prime assets well located to service Asia…the recent share price retreat represents a good opportunity to buy or accumulate.”

Cleo Nanni, Novus Capital

Nanni maintains a hold recommendation on BHP, however he concedes that it offers a global portfolio of quality and diversified assets and should be picked up at current levels. “Recent price action has us buying on dips…the company provides great value at these levels. Don’t sell; this will always be a long-term hold.”

George Raftopulos, Atom Funds Management

Raftopoulos says the current environment favours diversified large caps like BHP and Rio Tinto. “Given that the long-term fundamental view remains bullish, the safest way to play resources is having an eclectic mix of large low-cost operators with good resources and strong infrastructure,” says Raftopulos.

>>Back to the newsletter to view other articles – August 13th 2011

 

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