Price target decreases & downgrades

CSR Limited (CSR)

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


Share Price: $2.08

Price target: $2.30 (Merrill Lynch)

Broker Calls: Sell – Lincoln, Wilson HTM

P/E: 12.67

Market Cap: $1,052 million

The strong Aussie dollar isn’t doing CSR any favours.

Despite rising 5% since Tuesday, CSR has lost 17% over the past three months and 30% over six months since it undertook a share consolidation. That loss is nothing when you consider that the stock has plunged a miserable 65% over the past year. All this despite full year profit rebounding and the announcement that it is assessing a number of opportunities for bolt-on acquisitions between $25-100 million each. It also said that the sale of its Brendale property will be completed in the second half of 2011/12.

Incoming chief executive Rob Sindel told shareholders the company will focus on making acquisitions that complement its existing portfolio of businesses, especially in the multi-residential construction area and he expects more acquisition opportunities to arise in the next 12 to 24 months. The sale of CSR’s property at Brendale in Queensland had been delayed by the January floods, and will now be completed in the second half of 2011/12.

Apart from the recent floods, CSR is facing a number of headwinds, from a softer property market to the impact of the carbon tax. It expects Australian housing starts to be around 150,000 to March 31, 2012, however this may be an optimistic projection and it admits that non-residential markets for building product sales remain challenging.

James Samson, Lincoln Indicators has a sell on the building products company that recently provided a cautious outlook for the rest of the financial year. ‘The company indicated it’s aiming at the lower end of profit guidance provided there’s no further deterioration in the building products market,’ says Samson. ‘We feel the risks are too high at the moment.’

Peter Day, Wilson HTM also has a sell on the company despite recently reporting 13 per cent profit growth for the first half. ‘But, as expected, company commentary and statistics increasingly point towards a softer residential outlook, particularly in Victoria,’ he says. Accordingly, we have downgraded second half expectations.

Several other brokers – including Merrill Lynch, JP Morgan, Deutsche, Credit Suisse, Macquarie and Citi – have downgraded the stock to Neutral, lowering their price targets in the process. 


Cochlear (COH)

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


Share Price: $60.70

Price target: $49.01 (Citi)

Broker Calls: Sell – Think Technically, UBS, Citi

P/E: 20.53

Market Cap: $3,454 million

As Cochlear’s shares went into freefall following a major product recall, contrarian investors keen for a bargain  made strong gains. However despite a recent bounce brokers believe that future conditions look break.

Cochlear was hit hard after announcing a product recall late last year that stunned the market, with shares tumbling almost 50%. While the share price has made a solid 30% recovery from the panic low of $45.77 hit in October 2011, it is still down 25% for the year and 30% since hitting a record high of $84.87 in May last year.

Despite the share price recovery, brokers such as Merrill Lynch aren’t convinced that the stock is heading straight back to the glory days of $85. 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%).

And just last week Citi reiterated its sell call, albeit increasing its price target from $43.75 to $49.01. The increase in price target, however, has nothing to do with a change in the grim outlook for Cochlear, but rather a change in the outlook for the Aussie dollar. Citi analysts see the Aussie falling to 90 cents against the USD in the years ahead, which will help Cochlear’s bottom line.

It’s difficult to estimate the damage inflicted on Cochlear’s reputation and long-term earnings by the product recall. The company has never had a recall before. The recall was only for products yet to be implanted, with existing failures being corrected with parts replacements.  This of course raises the question of what happens if already implanted devices also start to fail.

Deutsche has recently upgraded from a Sell to a Hold on Cochlear, saying that now the company has identified the cause of the failures it can start working on solving the problem. 

Meanwhile several brokers believe that Cochlear’s woes have only just begun. UBS is fearful that Cochlear could face a bigger loss of market share than anticipated, with an acceleration in N5 failures. The broker also thinks that dividends may be pressured and has a firm sell on the hearing implant manufacturer.

Think Technically also has a sell on the company, noting damage to the Cochlear brand and competitive pressures with Sonova re-entering the US market. ‘The company’s reputation is under scrutiny and any further problems could impact future sales,’ says Mark Lennox of ThinkTechnically. ‘Management not only has to contend with a global recall of the Nucleus 5 hearing implant, but with competitor Sonova re-entering the US market…perceptions of stock upside will be limited at best.’ 

Goldman Sachs is another broker to join the queue, cutting earnings forecasts by 30% to 40% and warning of lower margins.  Goldman has a Sell on Cochlear too.


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