The phones are quiet in broker land as bearish gloom grips. But the analysts’ reports still have to be produced and in theory such bearish conditions create good opportunities to buy. In theory. Wesfarmers, which is diversified, big and reasonably cashed up, is getting some analyst attention. Goldman Sachs has a buy. Goldman says the stock on 18.6% debt to equity. It is on a price earnings ratio of about 15.9 times, slightly high, but has a prospective fully franked dividend of 5%, which is pretty strong for such a varied company with such varied operations (even if a big part of that is Coles and the dreaded retail sector). The catch is that Goldman is arguing that eps growth will fall from 22% in 2011-2012 to only 6.6% next financial year then go back up to 19% for 2013-2014. Perhaps. Or it might stay in the doldrums.
Goldman has a target price of $39.67. UBS also has a buy despite having a much lower target price of $32.80. That must mean it is largely a dividend play to UBS, but in this market that sounds about right.
UBS is upgrading its coal forecasts:
Upgrading near term HCC prices by ~9.5% to US$230/t UBS’ global commodities team have upwardly revised near term met-coal forecasts by 3-10%. For 1Q CY12 our HCC and SHC forecasts have increased to US$230/t and US$165/t respectively. The revisions reflect ongoing supply uncertainty associated with the BMA strike action (affecting 7 mines delivering ~20% of seaborne supply) and constrained QLD production, with mines yet to fully recover from the floods. Beyond 1Q CY12 our price forecasts are largely unchanged with the aforementioned supply constraints expected to normalise.
Maintain Buy – 1Q sales result could surprise to the upside…WES has outperformed WOW by ~12% over the last qtr with the Coles F&L business now trading at a ~22% premium to WOW F&L on a FY13 EV/EBIT basis. While we believe WES is approaching fair value, we see scope for further outperformance near term with industry feedback suggesting upside to our Q1 retail forecasts. With the above in mind we have Buy rating ahead of the 1Q FY12 retail sales result on 20-Aug.
Not exactly a recommendation to rush out and buy. But in bearish times, that is pretty inevitable. UBS is generally advising inclining towards resources:
The sell-off in global equity markets since mid-April has been driven by 2 key concerns 1) Evidence of slowing/disappointing global growth and 2) arguably the dominant driver, tail risk concerns in respect of the Euro-zone sovereign debt crisis. Cyclical and higher-beta sectors generally underperformed relative to defensive lower-beta sectors. Australia has also been influenced by some unique earnings pressures this year, namely the various headwinds emanating from a strong currency and a distinctly two-tiered economy.
Normalisation = Higher Valuations
Risk aversion is unusually elevated in recent months, driving a significant de-rating of equities and a sharp rotation out of risky sectors. Our core view is that the sell off is overdone relative to fundamentals, notwithstanding the recent bounce and the lingering tail risks in Europe. We believe the recent rebound can ultimately run further, particularly given where risk aversion indicators and valuations are currently sitting.Overweight Resources & Resource-Services
This scenario should favour higher beta sectors with strong fundamentals such as resources and resource-services over the highly defensive outperformers of the past six months. Domestic cyclicals are showing signs of bottoming after a very poor 12 months, though structural headwinds persist. Our view from these levels is relatively neutral. We continue with a small overweight in banks but once again acknowledge the structural headwinds from subdued credit growth.
A tried and true broking strategy. Start with an observation of the obvious, then pick the one sector that looks halfway decent. One could say that if the global financial system survives then the sell off has been overdone.