In today’s market any company that fails to meet earnings or production targets will be punished – and that also goes for the big, established players like banks and big mining companies.
This week’s list of broker downgrades shows bearish sentiment towards the banking sector, with National Australia Bank and Bank of Queensland featured over rising risks of bad debts. As the economic downturn progresses at home and abroad, attention is starting to focus on the risks banks face due to a rising number of insolvent companies and households. Citi downgraded NAB from a Buy to a Hold, and adjusted its earnings forecasts lower to account for growing risks (a possible spill out from the European debt crisis) and the growing threat of bad debts. Bank of Queensland, too, has brokers like JP Morgan worried as its cash earnings are lower on account of bad debts.
More bad news could be in store for beleaguered retailer Billabong, with RBS slashing its target price from $4.25 to $3.65 as a lower Aussie dollar is increasing the size of the company’s US debt. If Billabong is forced to undertake a capital raising it may force further downward pressure on its share price.
It may come of a surprise to spot Ramsay Health Care on the list this week. While the rest of the market has been pummelled over the past year, Ramsay’s share price has floated up the charts, up 20% in the last year, and a stunning 76% in the past 2 years. This stock’s performance has been a shining light amidst the market downturn. However, UBS thinks that the stock is looking a fully priced – and has placed a sell on Ramsay, as well as a price target of $17 (it’s currently sitting at $18.80).
Although Cochlear fell from grace over its product recall – the share price has neatly trotted up its price chart from a low of $45 in early October. The stock shot up 10% just last week. Merrill Lynch isn’t convinced, however, that the stock is heading straight back to the glory days of $85, a height it reached in early April this year. The risk is how long will Cochlear stay out of the market, and what impact will the recall have on its market share (Merrill thinks its market share could tumble from 67% prior to the recall to 59%).
On the mining front, broker downgrades included the big boys – BHP and Rio Tinto. The trouble with the big miners is that the past isn’t easy to replicate; soaring commodity prices and a near-vertical ascent in the growth rate of the world’s most resource-hungry nation China. As analysts adjust commodity prices downwards, as well as expected growth rates in China, target prices on the big miners are reduced accordingly. Credit Suisse has dropped its 12-month price target on Rio from $112 to $100 based on lower 2012-14 iron ore forecasts, while JP Morgan has cut its target price on BHP from $57 to $55 on the back of slower commodity prices and Aussie dollar forecasts.
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