It’s because of the mining boom. It’s the fallout from the global financial crisis. It’s the ill effects of globalisation. Or the internet revolution. Financial deregulation. Whatever the reason for it, some of Australia’s biggest icons are at fire-sale prices. This week we analyse four sold-off Aussie icons.

Qantas sees sky-high growth in Asia

Chart: Share price over the year versus ASX200 (XJO)

 

Stock code: QAN

Share Price: $1.47

P/E: 11.04

Market Cap: $3,318 million

Qantas has not been in the good books with investors and staff recently and its share price has nosedived. Management’s hardline approach to unions – involving a costly grounding of 108 airplanes across 22 airports – was not good for its brand, its staff or for passengers stranded all over the world. Its shares have slumped by 43% this year and 70% over the past five years (see chart above).

Nevertheless Qantas has a plan in mind and that’s Asia. It’s set on becoming a major airline in the region, and with this expansion in mind investors may be inclined to use any short-term weakness to hop board for the long haul. If Qantas does pull off its Asian strategy – involving two airlines in Asia including a Jetstar franchise in Japan – it’s market capitalisation should increase accordingly.

Already, Asia is the largest and fastest growing market in the world. Last year Beijing Capital International Airport overtook London Healthrow to become the second busiest airline in the world after Atlanta, with roughly 74 million travellers passing through its gates.

Analysts are licking their lips. As air travel booms, demand for aircraft, hotels, restaurants, retailers, even property will benefit.

Peter Harbison, executive chairman of CAPA Centre for Aviation in Sydney is reported as saying: “What is happening is a once-in-history change. The numbers simply defy traditional forecasting.” He notes that once the tightly regulated markets in Japan, China and South Korea start opening to foreign carriers, some 300 million more people will begin travelling between these countries, which is 20 times today’s numbers.

Qantas chief executive, Alan Joyce is set on establishing an ultra-premium airline in Kuala Lumpur or Singapore next year. Closer alliances with Asian carriers is a key facet in his Asian growth strategy, with possibilities of teeing up with Malaysian Airlines, and Hainan Airlines out of Hong Kong.

Asia has “massive untapped potential,” said Joyce, at a company’s briefing to analysts in August. “The future will be about travel to and within Asia.”

Brokers are bullish. BA-Merrill Lynch notes that although grounding the fleet was costly, it thinks the stock’s a solid buy. JP Morgan is of the same opinion, noting that Qantas is on track for a strong recovery next year. UBS, too, has a buy on Qantas. It thinks that the shift in power towards management will benefit the stock.

Investors must admit, if Qantas is performing satisfactorily now when the majority of airlines around the world are doing it tough, surely that bodes well for less turbulent times. American Airlines announced in November that it was filing for bankruptcy protection to cut costs and unload massive debt. Delta, Northwest, United and US Airways all went through bankruptcy proceedings in the last 10 years.

The risks for investors in Qantas is whether or not the Asian growth strategy not only works, but is also profitable. Airlines are notoriously risky, and are beholden to fuel prices, Government security measures, currency movements, weather patterns and the rise of competition.

As well, Qantas faces the sting of $194 million in costs from the industrial action, sending its profit down roughly 66% to $140 million in the first half.

Management’s plans to launch into Asia, and profit from the burgeoning middle class, also hinges on growth forecasts of those countries. The OECD expects Southeast Asia’s six major economies to slow through 2016, as leading economies in Europe face the prospect of recession or even a depression. It expects growth in the Eurozone to stall next year, dropping to 0.2% from 1.6% this year, while US growth could slump to 0.3% next year from 1.7% this year.

On top of this, Qantas isn’t the only airline battling for a share in the lucrative Asian market.

 

QBE Insurance at mercy of stormy weather

Chart: Share price over the year versus ASX200 (XJO)

 

Stock code: QBE

Share Price: $13.12

P/E: 10.63

Market Cap: $14,636 million

 

Australia’s biggest insurer QBE Insurance’s share price has taken a battering – tumbling 27% over the past year and halving over the past five years – as large catastrophe claims from storms, cyclones, earthquakes and tornados sees it paying out more than usual.

Today its shares hover at $13, a far cry from $25 at the beginning of 2010 and the $35 it hit in 2007.

But QBE is still a favourite stock with brokers and fund managers alike. Aberdeen Australian Equities Fund continues to hold QBE for its diversification of product class and geography (QBE has made 75 acquisitions in the last 10 years across 50 countries); the company also has no holdings of sovereign debt issued by the peripheral European countries, a stable and experienced management team and a strong underwriting discipline.

The company’s failure to meet its full-year insurance profit margin of 15-18% – coming in at 11-14% instead, plus the fall in risk-free interest rates was a blow to shareholders.

Michael Heffernan at Austock has a sell on QBE. “This one time sharemarket favourite has recently fallen on hard times mostly due to the high number of natural disasters in the past year. Also, its investment strategy, relying very much on fixed interest, has been adversely impacted by particularly low global interest rates,” he notes.

QBE isn’t alone in bearing the brunt of a bad weather patterns. Insurers globally have been doing it tough.

QBE management, however, don’t seem too perturbed by share price weakness. Over August, two directors were acquiring shares in the stock. Management is also keen to use excess cash to make further acquisitions.

Cameron Bell from Intersuisse was more upbeat, with a buy rating attached in late October 2011. Bell argued: “QBE offers strong management and an excellent business model based on conservatism. Volatile and weak global markets have restricted the share price recently, but it’s trading on a very cheap multiple and is paying a dividend yield above 9 per cent. The company has a sound balance sheet and generates very strong cash flow.”

The question for investors is whether QBE’s fortunes are short-term, or not. Global catastrophic events are becoming more the norm than the exception as our environment deteriorates. For climate sceptics this is clearly not something to worry about, but for others – note this as a factor X when buying QBE shares for the long haul.

 

Fairfax family abandons stake

Chart: Share price over the year versus ASX200 (XJO)

 

Stock code: FXJ

Share Price: $0.74

P/E: 11.04

Market Cap: $3,318 million

Fairfax, the owner of Australia’s most prestigious newspaper, The Sydney Morning Herald, which has framed our conversation and our culture for some 180 years is at record lows. Its shares are now trading at just $0.74, down 47% in the past year and 85% over the past five years. Take a look at Fairfax’s 5-year share price chart above. It’s a weeping willow of a stock.

In 2011 the remaining Fairfax family holders have abandoned the company – John B. Fairfax sold his final 9.7% stake in his beloved company for a dismal $900 million loss, and at the end of 2011 his son Nicholas quit the Fairfax board.

At its most recent AGM Fairfax Media chief executive Greg Hywood blamed Europe, volatile equity prices, weak real estate prices and a nervous consumer for the company’s ills. “In Australia and New Zealand, consumer confidence levels remain subdued with consequential impact on most advertising categories but particularly retail and residential real estate,” he lamented.

It’s true that the internet revolution has altered the way that people read news. Australian newspaper circulation continues to fall, down 3.5% just in the three months to September 30, compared to the same time last year. The weekday edition of The Sydney Morning Herald experienced a 7.2% drop in circulation, and is now below 200,000 readers.

The news media has always been a hot commodity for wealthy business owners. Owning the media, or the country’s mouthpiece, offers unparrelled power across all fields from economics, politics, business and entertainment. Rupert Murdoch’s News Corporation is a case in point. The Australian newspaper has rarely been in the black, but that’s hardly relevant to the media mogul.

At the end of the day, wealthy business owners don’t give a hoot whether or not Fairfax is a gravy train. The value of the company lies in its deep conversational ties with the Australian public, its brand name, its history and reach. And for this reason, investors should keep an eye out on Fairfax over the coming year, particularly if its shares continue to slide further south.

As Fairfax shares sink lower, the chances of a takeover bid grow. And this is especially the case now that the latest batch of Fairfax stock went to institutional investors. Clearly, some 50 institutional investors who bought in believe in the long-term value of Fairfax stock.

So what do the brokers reckon?

Macquarie has an underperform on Fairfax, and notes that the company’s Trade Me IPO has enabled Fairfax to pay back some debt and reduce its interest rate burden. However given ongoing structural difficulties, earnings will remain under pressure for some time, the broker thinks.

Just recently Clive Briggs, RBS Morgans told TheBull that it continues to trim its Fairfax earnings expectations. “Although the stock is very cheap, trading conditions are weak. Advertising revenue in the past six months has been softer than usual. Conditions will eventually improve. But at this point, we regard FXJ as a short term trading sell.”

Merrill Lynch also has an underperform, however there are a host of other brokers that are see better days ahead for the media giant. UBS and RBS have buys on Fairfax, complete with a $1.37 price target, while Credit Suisse has an outperform on it, stating that it offers long-term value.

 

Macquarie Bank reinvents itself 

Chart: Share price over the year versus ASX200 (XJO)

 

Stock code: MQG

Share Price: $24.25

P/E: 9.54

Market Cap: $8,453 million

Macquare Bank has been slaughtered by the global credit crunch. Its shares have fallen by 38% from their lofty heights of $40 back in February this year and are down 70% over the past 5 years. Shares currently sit around $24.

Macquarie today faces a very different trading environment. The big growth numbers are getting scaled back and a more conservative business model focussing on annuity-style businesses such as wealth management and corporate & asset finance is being put into place. Since the GFC, Macquarie has shed its infrastructure management business, and also keen to sell Macquarie Airports for the right price.

Outlined by Moody’s, the risks for Macquarie Bank is protracted weakness in the financial sector, and the rise of global competitors in its capital markets business. Macquarie’s capital markets businesses is leveraged to an upturn in global financial markets and if this doesn’t eventuate the group may face challenges in maintaining its traditionally strong capital coverage.

Standard & Poor’s has downgraded Macquarie Group’s credit rating by two notches to BBB, which is just two notches above junk-bond status. It is Macquarie’s exposure to complex and volatile markets that has the rating agency worried, although it is heartened by Macquarie’s attempts to reduce its reliance on equity market earnings.

Citi says that credit downgrades impact funding costs – however it shouldn’t affect Macquarie’s earnings too badly, with Citi continuing to place a buy on the stock.

BA-Merrill Lynch has a price target of $33. The broker see value from its annuity-style income such as its fund management division and thinks that provided its funding sources prove sustainable, the stock is a buy.

On the other hand, JP Morgan sees too many uncertainties on the horizon to be bullish, such as the bank’s proposed $800m share buyback. It rates the stock a neutral, a downgrade from a buy with a $28.59 price target. The broker is bearish since Macquarie faces the prospect of yet another weak half year ahead.

The biggest risk with buying Macquarie stock is its exposure to equity markets globally via its stockbroking, investment banking and capital markets trading businesses. Unless the market pulls off a sustainable rebound, Macquarie will be forced to slash costs further. Staff, already down by 468 employees over the 6 months to September 2011, will be the first to go – impacting staff morale further in what was once coined the Millionaires’ Factory.

But for investors thinking about the outlook for Macquarie in 5 years’ time, will its share price be higher than it is today? That’s the million dollar question.

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.

More articles from this week’s newsletter

18 Share Tips – 9 January 2012

Big-Name Blue Chips At Record Lows

Don’t Be The Greater Fool On Mining IPOs

Oversold Gold Stocks Offer Plenty Of Scope For Gains

A Look At The Eurozone In 2012

5 Questions When You’re In A Trading Rut 

Rolling year highs on the ASX

Rolling year lows on the ASX

Top 10 shorted stocks on the ASX

Breaking News – all the latest Australian stockmarket news

Market Data: Check out TheBull’s market data for charts, quotes and company information