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6 to BUY, 6 to SELL and 6 to HOLD
Andrew Doherty, MORNINGSTAR
This building materials supplier operates in a difficult industry defined by cyclical demand. The industry requires high levels of investment in capacity, resulting in relatively low returns on capital. It’s able to handle these conditions reasonably well, with strong positions in not overly competitive markets. Recent price rises have helped offset declining volumes. The stock remains undervalued for patient higher-risk investors. The fully franked 7 per cent dividend yield provides some support.
ASX Limited (ASX)
The ASX operates Australia's largest national exchange for securities trading and is a simple franchise: a monopoly. But it will soon face unproven competition - clipping the stock exchange activity ticket. If you want leverage to an improving Australian equity market, then it’s hard to go past the ASX, whose main earnings drivers are listed companies, new listings and trading volumes in equities and derivatives.
Australia's leading supermarket retailer offers reliable earnings growth stemming from price increases, the roll-out of new stores, extension into new retailing categories, such as liquor and petrol, efficiency gains and cost controls. WOW is a defensive growth stock with a solid balance sheet and sustainable competitive advantages.
Telecom Corporation of New Zealand (TEL)
New Zealand's dominant telco has been a reliable cash flow generator in the past through a diverse product range. Scale brings cost advantages. It’s well placed to respond to industry regulatory changes in the long term, but for now increasing competition is crimping margins amid rising capital expenditure from investing in new technology. Cash generation remains strong, but the dividend is likely to be cut this year.
JB Hi-Fi (JBH)
JBH operates more than100 branded electrical stores across Australia and New Zealand. The company is rapidly growing via an aggressive store roll-out program. Sales of electronics and home theatre systems have remained solid to now, but we’re concerned that economic conditions will get tougher and the company will be exposed to price deflation and intense competition.
Valad Property Group (VPG)
A real estate investment trust with assets in Australia, Europe and the UK. Rental income and funds management fees deliver stable earnings (62 per cent of 2008 total revenue). But medium-term growth is dependent upon the riskier businesses of development, trading and capital services. VPG has been particularly hurt by the collapse of investor confidence in entrepreneurial property developers. Uncertainty is behind our recommendation.
Michael Heffernan, AUSTOCK
Telstra Corporation (TLS)
Telstra has proved itself a “safe haven” stock in these turbulent times, and it’s very attractive dividend yield is rewarding patient investors. The telecommunications environment, from both a political and regulatory perspective, now seems more favourable to Telstra than it was several years ago. A good buying opportunity at these levels.
Australia’s biggest retailer continues to deliver results for consumers and investors even in tough economic times. Woolworths has proved its credentials in a market under selling pressure. Its robust record of profitability, excellent sharemarket fundamentals and an uncanny ability to make acquisitions work well makes Woolworths a sound buy in today’s environment.
Coca-Cola Amatil (CCL)
The underlying sharemarket fundamentals are reasonably attractive, but its debt/equity ratio is on the high side. There should be reasonable demand for the stock, even if the economy slows further. CCL has shown impressive resilience in the October turmoil.
This diversified industrial company’s integration of the Coles business seems to be going to plan. It has many “irons in the fire” with coal and insurance interests and the giant Bunnings hardware chain. A recent easing in share price appears to be overdone, and, at current levels, Wesfarmers could provide an opportunity.
Easing home building activity has hurt this company in the past 18 months. The prospect of the economy continuing to slow will do little to enhance future prospects. The recent trend in auction clearance rates gives little confidence about the housing sector in general.
Oz Minerals (OZL)
In hindsight, the union of Oxiana and Zinifex to form this company couldn’t have happened at a worse time. The outlook for copper, gold and zinc prices is bleak. Other major stocks, such as BHP Billiton and Rio Tinto, are much preferred in uncertain times.
Mark Goulopoulos, TOLHURST
Westpac Banking Corporation (WBC)
The recent profit result was very solid in the face of a difficult banking environment. The bank has the highest tier one capital ratio in the country, making it one of the most conservatively run banks. In the longer term, the merger with St George will create Australia’s largest bank on some measures, with an enviable wealth management division. This will drive strong profit growth as equity markets recover.
QBE Insurance (QBE)
As Australia’s premier insurance company and one of the best in the world, QBE is extremely well capitalised during a period of unprecedented uncertainty. This will be particularly beneficial as the failure of AIG in the US – the world’s largest insurer – will mean that some potentially attractive acquisition opportunities may emerge. QBE has a long history of successfully integrating attractive acquisitions.
Commonwealth Bank (CBA)
Despite having exposure to several Australian corporate failures in this financial downturn, the CBA remains a conservatively run bank with a predominantly Australian business. As interest rates continue to fall in the next 12 months, the business should receive reasonable support. Notwithstanding this, the bank retains its premium rating, therefore Westpac is preferred at current levels.
The rapid fall in crude oil prices will clearly benefit Qantas through lower jet fuel prices. Although this removes one of the major headwinds for the company, much weaker economic conditions are now a major concern due to the potential impact on tourism. With these two factors delicately poised, Qantas appears fairly priced, but further falls in the share price should be viewed as potential buying opportunities.
A perennial underperformer, Amcor continues to struggle in generating an adequate return on capital. It’s unlikely to recover in the short or medium term as management implements various initiatives to improve profits. Other companies are preferred for exposure to an improving equity market over the medium term.
Billabong International (BBG)
This sports apparel company has considerable exposure to a rapidly deteriorating US economy, with almost half of the company’s sales generated in this market. Also, the company’s products are premium priced, which produces strong margins. These margins may come under pressure as sales growth slows in coming months.
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