Collected Wisdom

This week we look at Qantas, Fortescue, Santos, BHP Billiton and Wesfarmers.

Summary: Qantas has swung to an underlying profit and flagged capacity growth domestically, with plans to return capital to shareholders. Fortescue Metals Group faces $US6bn in debt repayments due in 2019, with the iron ore price falling. Analysts are positive on the completion of GLNG for Santos but flag the potential for asset sales to deal with its debt, while commodity prices will be key for BHP and reactions to Wesfarmers were mixed.

Key take-out: Analysts remain bullish on Qantas, believing the company is cheap compared to its global peers and conservative with fuel cost guidance.

Key beneficiaries: General investors. Category: Shares.

This is an edited summary of the Australian investment press: It includes investment newsletters, major daily newspapers and broker reports. The recommendations offered represent the views published in the other publications and may not represent those of Eureka Report. This article is general advice only which has been prepared without taking into account your objectives, financial situation or needs. Before acting on it you should consider its appropriateness, having regard to your objectives, financial situation and needs.

Qantas Airways Limited (QAN)

On Thursday (August 20) QAN CEO Alan Joyce delivered the flying kangaroo’s full-year results and happily announced an underlying profit before tax of $975 million compared to last year’s loss of $646m. Also on the cards is a $505m capital return which equates to 23 cents per share.

With oil prices continuing to take a hit, analysts believe the company has been conservative with its guidance on fuel costs which are expected to be no more than $3.94 billion due to hedging. On top of this analysts view QAN as one of the cheapest airline stocks globally and the airline has flagged 3-4 per cent capacity growth domestically.

Despite risks of increased competition and a decline in economic conditions resulting in consumers tightening their belts analysts remain bullish with the consensus having the airline as a buy and an average price target of $4.45 with the outlier of $5.40 on the optimistic side and the most negative analyst sitting at $4.23. At the time of writing the share price is $3.47.

  • Investors are generally advised to buy Qantas at current levels.

Fortescue Metals Group (FMG)

It has not been a pleasant twelve months for FMG. I was going to liken it to a roller coaster ride but it has been more reminiscent of those rides that fall slowly, then rise, before plunging straight down. FMG announced their results surprising some analysts with the announcement of a 2c dividend.  

The FMG story is about two things, the price of iron ore and debt. The price of iron ore has been heading in the same direction as FMG’s share price and the single commodity resource company will have approximately $US6bn in debt repayments due in 2019.

This uncertain outlook has the majority of analysts calling FMG a hold but those labelling it a sell are catching up fast with very few sticking their neck out and putting a buy on it. The most positive analyst has a twelve month price target of $2.50 while the most negative sits at $0.91. The average is currently $1.75 and at the time of writing FMG’s share price is $1.815.

Consensus is FMG is a hold however it is edging closer to an even split between hold and sell.

  • Investors are generally advised to hold Fortescue Metals Group at current levels.

Santos Ltd (STO)

On Friday (August 21) STO handed down its full-year results which were marginally below analysts’ expectations but pleasing nonetheless in the face of headwinds from the falling oil price. On top of the results it was also announced current managing director David Knox would be stepping down after seven years at the helm of the oil and LNG producer once an appropriate successor can be found.

All analysts pointed positively towards the completion of GLNG and the positive cashflow position it now brings. Consensus has STO as a buy but all analysts flag it falls into a higher risk category and expect the potential for sustained weakness in the oil price to be the main cause for concern. Additionally analysts have flagged the potential for either asset sales or a capital raising in the future to deal with the $8.6bn worth of debt.

One thing to note about this stock is that is has been sold off very hard: It was trading at $15 less than a year ago.

At the time of writing STO was trading at $4.95. The twelve month consensus price target is $7.72 with the most optimistic target at $9.20 and the most bearish at $4.90.

  • Investors are generally advised to buy Santos at current levels.

BHP Billiton Ltd (BHP)

After market close yesterday (August 25) BHP Billiton released full-year results with the diversified miner missing earnings expectations after being slapped around by falling commodity prices.

The main story coming out of it was the further cutting of capex and costs and the maintained commitment to its progressive dividend with analysts looking at an FY16 yield of around 7 per cent. Consensus has BHP as a buy at current levels (opening price on August 26 of $23) with the consensus price target is $30.73 with the most bullish at $33 and the most bearish at $26.

All analysts pointed to the obvious key risks of sustained weaker commodity prices with upside potential for BHP being a recovery in commodity prices and a weaker Australian dollar vs the US dollar.

  • Investors are generally advised to buy BHP at current levels.

Wesfarmers Ltd (WES)

Analyst reactions to Wesfarmers were mixed. This is not surprising given the diversity of earnings drivers contained within the $45bn conglomerate.

The major interest is Coles and its battle with Woolworths. In recent years Coles has done an excellent job restructuring and improving margins. But a couple of analysts were concerned that the rate of margin expansion may now be slowing.

Although no surprise, the coal division remains a drag and the outlook is not expected to improve. An expectation of lower long-term coal prices was one of the key reasons for a sell recommendation being retained by one of the investment banks.

The competitive pressures in the retail businesses are likely to remain a challenge. But across the board the retail divisions performed well, generally outperforming their peers. Bunnings and Kmart continue to perform strongly, while Target is showing signs of improvement. Retail earnings were up 10 per cent offsetting some of the weakness from the industrial division that was down 50 per cent.

From the major brokers there are three buy recommendations, seven holds and a sell. The current share price of $39.42 is trading at a slight discount to the average price target of $43.48.

  • Investors are generally advised to hold Wesfarmers at current levels.

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