Broker Stock Recommendations
Richard Batt, SHADFORTHS
The Reject Shop (TRS)
A discount variety retailer that’s grown to more than 160 stores nationwide. The company’s first half result was in line with forecasts, and despite indications of a general downturn in retail sales, the company is holding its own. With an attractive fully-franked dividend yield, The Reject Shop is a suitable long-term investment.
Origin Energy (ORG)
Origin is a vertically integrated energy company that is the largest gas generator in Australia. It has the ability to make further acquisitions and it offers an extensive list of existing projects that can provide organic growth. It has a sustainable dividend and provides quality exposure to the energy sector, particularly through its coal seam gas reserves.
Commonwealth Bank (CBA)
The bank recently reported a solid 2009 first half result, indicating that large gains in market share and strong cost controls are driving growth in underlying earnings. The company retained its interim dividend, which in a tough environment is a good outcome. The stock is attractive for long-term income and growth portfolios.
The outlook for this industrial giant in the next 12-to-18 months is subdued, reflecting challenging economic conditions and lower consumer confidence. However, the turnaround at Coles is well underway, and the Bunnings hardware chain and Target stores are doing well. The risks associated with financial security have also abated after the equity raising. Now with a stronger balance sheet, WES is long-term hold for portfolios.
Bendigo Bank (BEN)
The global economic slowdown and the drying up of credit had a major impact on the banking sectors in the US and Australia. The difficulty in obtaining funding is likely to slow growth for Australian banks, with the regionals at a clear disadvantage to the “big four.” Due to the ongoing challenges facing the regional banks, we prefer the majors.
Futuris Corporation (FCL)
After reporting a worse than forecast loss, and suspending the interim dividend, Futuris faces a challenging time in re-focusing this diversified agribusiness. And, as a result, chase better opportunities elsewhere.
Peter Russell, INTERSUISSE
Westpac Bank (WBC)
Westpac is Australia’s largest bank and, arguably, the best positioned. Australia’s big “four pillars’ are rated in the top twenty-odd global banks. While increasing credit defaults are pressuring dividends, the banks are still well capitalised and growing.
IMF (Australia) (IMF)
A leader in litigation funding, IMF is one of the few companies enjoying a surge in business. Expect this to continue as banks and creditors seek recoveries. A combination of cash reserves, no debt, experienced management and plenty of court cases add up to a timely investment.
Adelaide Brighton (ABC)
ABC is a leading integrated supplier of cement and lime to the construction, engineering, infrastructure and resources sectors. A fall in lime revenues in most resources sectors will be offset by revenue increases from gold and aluminium producers. Infrastructure spending, courtesy of the Federal Government’s stimulus package, will lift cement sales.
Foster’s Group (FGL)
Foster’s is a good defensive play as its beer products are mostly cushioned in an economic downturn. Half-year results were steady, with strong cash flow. Retaining its dividend suggests a 5 per cent annual yield. Wine again disappoints, but beer remains strong.
Aristocrat Leisure (ALL)
Gaming venues across the world are buying fewer electronic gaming machines and software in this economic downturn. This is likely to continue in the US, and also in Australia in response to gaming licence changes. The company’s profits and cash position weakened in 2008, and the new managing director faces significant challenges.
In times like these, stick with the leaders in sectors that offer strong financials and franchises. Although paint and varnish maker Wattyl’s share price has substantially fallen, the last half showed a loss, no dividend and higher debt. Recovery will be tough.
Ben Potter, ABN AMRO Morgans
The supermarket giant benefits from a conservative balance sheet and high interest cover, which should enable it to take advantage of organic and acquisitive growth opportunities as they arise during the next 12 months. An ability to generate a lot of cash, combined with a relatively high degree of earnings certainty and transparency, justifies the company trading at a premium to the market.
Origin Energy (ORG)
Its long-term growth prospects and acquisition track record provide a robust story. The recent share price sell-off has been overdone and we remain bullish about Origin’s future. Substantial cash reserves could motivate Origin to initiate acquisition deals, which, in turn, will boost the share price.
Westpac Bank (WBC)
The banking sector faces multiple headwinds of a structural and cyclical nature. But the synergy benefits from the St George merger and a $3 billion capital raising puts WBC ahead of its banking peers. A recent survey by the Boston Consulting Group declared Westpac the world’s most profitable bank with a return on equity of 20.4 per cent in 2008.
This gambling company’s recent $450 million capital raising will reduce earnings per share, but provide important funding flexibility and make an already solid balance sheet even stronger. The company is fair value, with a 2009 price-to-earnings multiple of 10.3, but a hold recommendation is retained as we believe it’s too early to buy.
Harvey Norman (HVN)
Expect discretionary retailers, such as Harvey Norman, to underperform in a slowing economy, with increasing pressure placed on costs and margins. Its balance sheet will attract even closer scrutiny, and may be impacted if the company is forced to sell some small stores or second tier retailers.
James Hardie Industries N.V. (JHX)
Against a troubled US housing outlook and rising input costs, there is too much earnings uncertainty going forward, shown by the indefinite suspension of its dividend. The only upside risk for James Hardie, in the short term, is the possibility of a competitor making a takeover play.
Other articles in this week’s newsletter
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