Investors are normally rewarded for sticking it out through tough times by a share price recovery when the good times return. Investors today can’t be so confident, particularly in the face of structural changes in the economy that could see some companies come under increasing pressure. A stubbornly high Australian dollar, the shift to online, the rise of globalisation and its accompanying competitive pressures, crises and setbacks – these are structural changes that alter the foundations for companies operating today.
Media giant Fairfax that has been a victim of the digital revolution and the accompanying shift of advertising revenue from print to online. Now loyal shareholders are reeling from the news of the Fairfax family selling their remaining shares in the beleaguered company to institutional investors – at a severe discount to the current share price.
John B. Fairfax sold the family’s last remaining shares in Fairfax Media, 9.7% of the company, to over 50 institutional investors. The sale, at 85 cents, created a paper loss of around $900 million for the family. Neither Fairfax Chairman Ron Walker nor Australia’s richest woman, Gina Rinehart, purchased shares in the sell down.
Merrill Lynch have an underperform on Fairfax; one area of positive sentiment is the rising popularity of reading news on tablets, they report. Broker consensus places a Hold on Fairfax with a price target range of $0.83 to $1.39. The share price is currently $0.86.
Yet another household name, Harvey Norman, continues to lurch from one disappointing quarter to the next. Merrill Lynch has slashed its earnings by 10%, and its target price from $2.10 to $1.95. The broker notes that Harvey Norman’s sales figures were propped up by clearance sales from its Clive Peters stores as well as a two-for-one laptop deal. Executive chairman Gerry Harvey noted that all retailers in the technology sector were doing it tough as margins and prices fell. Harvey doesn’t think that it will be a good Christmas – so shareholders take note. Harvey Norman currently trades at $2.21, down from its yearly high of $3.24.
Investors are starting to worry about the fortunes of once market darling Fortescue Metals, the best performing stock on the ASX for the last 20 years. Fortescue Metals is confident that the iron ore price dump has hit a floor and that Chinese steel demand remains strong. Macquarie, too, is bullish on the iron ore price into 2012, arguing that China steel mills need to restock and contract volume uptake is increasing.
The iron ore oligopoly – consisting of Vale, BHP and Rio – are still shipping at record levels; production has not shifted in light of recent price weakness, however, a double dip and continued woes out of Europe may find miners abandoning projects as financing becomes trickier.
Some analysts are not so confident that the iron ore price will bounce straight back up. There’s growing sentiment that commodity prices have peaked and that the next few years will see prices hovering some 20% below peak levels.
China’s steel production dropped 3.6% in October compared to the month before, indicating a slight slowdown in growth for the world’s second largest economy.
Deutsche Bank has reduced its valuation on Fortescue by 1% to $5.47 following Fortescue’s $1.4 billion debt raising in unsecured high-yield US bonds; the fixed rate is almost 2 percentage points higher than debt raised last year. Standard & Poor gave the bonds a B+ rating, which equates to high-yield, or junk.
Fortescue Metals is facing heat from Australia’s Yindjibarndi (WMY) community for mining on indigenous heritage. Sacred sites are in danger of being blasted by a company vigorous to ship some 55 million tonnes of iron ore in the year to June 2012, to meet annual guidance numbers.
Fortescue’s shares are down almost 30% over the last year, giving shareholders plenty to worry about. Chairman Andrew Forrest, however, used recent share price weakness to add to his personal holdings – a spending spree valued at some $100 million.
As Cochlear’s shares went into freefall following a major product recall, contrarian investors keen for a bargain wanted to know more. So far there hasn’t been an easy fix.
UBS is fearful that Cochlear could face a bigger loss of market share than anticipated, with an acceleration in N5 failures. Deutsche has a Sell on Cochlear, as competitor devices may start to appear attractive to patients as the failure rate continues to climb. Credit Suisse, too, is concerned over the rising rate of failures; N5 failure rate was 20 in August, 55 in September and 90 in October.
Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.