The Aussie dollar is one of the stongest currencies in the world – a situation which has done more harm than good to most Aussie companies. Earlier this year the Aussie dollar was worth $1.08 US, a record high. It currently sits around $1.04.
Global growth forecasts have been cut, commodity prices are down, the mining boom is on life support and Chinese economic growth is flattening. Nevertheless, the Aussie dollar remains stubbornly high. Even cuts to interest rates have done little to nudge it lower.
One reason for the resilience of the Aussie dollar is the dearth of other strong currencies. While conditions in Australia are hardly as bouyant as the recent past, conditions elsewhere are worse.
But could the situation reverse? Could Australia slow while other industrialised nations pull themselves out of recession? And if so, how will that impact the Aussie dollar?
Successful stock pickers don’t just buy stocks that profit from current economic conditions; instead they try to project into a future landscape and target stocks that will lead the pack. For example, if the Aussie dollar does an about face – a number of heavily sold down stocks will follow suit. Here are 7 companies worth watching:
Forward P/E (2013)
2 Yr Earnings Growth Forecast
|% change (YOY)|
The first stock in the table is a former favorite of the analyst community, medical device maker Cochlear (COH). Today UBS, Deutsche Bank, and Citi have SELL recommendations on COH and JP Morgan downgraded the stock in August to NEUTRAL, slashing its price target from $67 to $60. The stock is currently trading around $74.
Their first concern is the run-up in the share price, which you can see in dramatic fashion in a year over year share price chart:
When you couple the 40% share price rise with a modest yield and growth forecast, you can understand why some analysts see COH as overvalued. There are additional concerns about COH losing market share to rival Advanced Bionics, a US based manufacturer introducing three competitive hearing products in 2013.
Cochlear does, however, derive over 40% of its revenue from the US with a similar slice from Europe. With much of its earnings derived from offshore, Cochlear will certainly benefit from a lower Aussie dollar.
James Hardie (JHX) is another company that’s performed well of late irrespective of analyst opinion. In September and October of 2012, four major investment firms downgraded JHX. Citi, RBS Australia, and UBS cut the stock to SELL and BA Merrill-Lynch went to NEUTRAL.
James Hardie is the world leader in cement based siding and flooring/wall construction products with technology competitors can’t match. Around 80% of revenue comes from the US where construction has been weak. Despite its meagre dividend and poor growth forecast, the stock is up 52%.
Hardies’ brand identification is powerful but the current price seems out of touch with reality. Here is the company’s 12-month price chart:
CSL Ltd (CSL) is a major biopharmaceutical producer specialising in the development and manufacture of vaccines and plasma protein biotherapies. Many of its products treat rare diseases. The company has facilities in Australia as well Germany, Switzerland and the United States. It’s also expanding into China.
An initial study on using plasma based treatments for Altzheimers from US-based Baxter Labs had positive results – which is good news for CSL.
The company generates just 11% of revenue in Australia – meaning a lower Aussie dollar would translate into higher profits.
Year over year the company’s share price is up 58% – more than any other share in our table. Despite this, not a single analyst from the major firms thinks CSL looks pricey. Currently, there are four BUY or OVERWEIGHT ratings and 4 HOLD or NEUTRAL ratings on CSL. The company has rewarded its investors with ROE’s above 20% in four of the last five years with a ten year total shareholder average annual return of 23.2%.
CSL demonstrates that quality companies can perform well in tough times. The company’s share price has risen an astonishing 700% over the last decade. Here is the chart:
With a 57% increase in share price year over year, Computershare (CPU) stands right behind CSL. CPU provides investor services to a wide variety of customers and is the largest share registrar in the world. Computershare handles over 1 million shareholder accounts for about 14,000 different investing organisations globally.
NPAT has fallen over the past two years, and the share price has retreated. The company’s FY 2012 annual report cited challenging conditions ahead. Here is its ten year chart:
Amcor (AMC) is the largest packaging company on the planet with a diverse revenue mix – including 85% from defensive sectors like food and beverage, tobacco and health care.
The company has an attractive forward P/E of 12.81 and an impressive P/S ratio of only 0.78 compared to the Materials Sector P/S of 12.38. Deutsche Bank, Citi, and RBS Australia have BUY ratings on the stock. Here is the company’s year over year share price performance:
Incitec Pivot (IPL) has an odd combination of product lines – fertilisers and explosives. Its fertiliser business places them squarely in the highly defensive agricultural sector, while explosives are used in the riskier construction and infrastructure fiel. IPL is exposed to commodity prices used in the manufacture of these products.
IPL’s fertiliser business is expanding in China and India – which offsets more sluggish conditions in the US. The 12% share price decline reflects lowered profitability as a result of the high Aussie dollar.
The final stock is global recycling company Sims Metal Management (SGM), which specialises in metals and electronics and components. The company is the largest recycler in the world with operations in North America and Australia. While the electronics recycling business is performing well, the metal operation is suffering from falling demand for steel and other metals as well as a lack of supply of recyclables (cost-conscious businesses are choosing to extend the life of metal-based assets rather than selling for scrap).
Here is a one year share price chart comparing SGM and IPL:
Despite difficult times, none of Australia’s major firms rate either stock as a SELL. Five major brokers have BUY or OUTPERFORM recommendations on SGM; those with HOLD or NEUTRAL ratings cite falling prices for scrap as the primary reason for bearishness.
The company is on a cost-cutting diet and a drop in the dollar could help – but the broader concerns will remain until global growth picks up. The fundametals, however, look good; a forward P/E of 9.32; a P/EG of 0.19, and a 92.7% 2 year earnings growth forecast make this stock one to watch.
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.