Collected Wisdom

This week we look at Origin Energy, Corporate Travel Management, Caltex, Primary Health Care, Domino’s Pizza and Sonic Healthcare.

Summary: Relying on average market returns to guide investment decisions can result in investors taking an overly negative view of the opportunities that exist. The ASX200’s limited diversity has contributed to negative sentiment, as the financials and natural resources sectors have dragged overall average performance down. Strong performers can still be picked from a market with subdued average growth. For example, as financials and resources have taken a hit in the UK market, the information technology sector has delivered very strong results.

Key take out: Value investors should be aware that the Australian economy looks set to move away from traditional investment areas, and they should look for companies capable of succeeding in challenging market conditions.

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.

Origin Energy Limited (ORG)

On December 22, Origin announced plans to hedge against further declining oil prices through buying put options on oil. The company also decided to forward-sell LNG at a fixed price. These transactions are in place to offset the group’s exposure to oil prices.

At the time of writing the crude oil price sits just above $US33. Origin has a strike price of $55 for 75 per cent of the 15 million barrels and $US40 for the remaining 25 per cent. The move has been seen as a prudent one by analysts as the possibility of crude hitting $US20 a barrel would not be out of the equation.

One analyst who has maintained a sell on Origin stated they would have preferred to see an asset sell off instead of the hedge, and stated the dividend could potentially come under threat if the oil price dropped below $US20.

The consensus call on ORG remains a buy with the average price target at $6.91 with the share price at $4.22 at the time of writing.

Investors are generally advised to buy Origin Energy Limited at current levels.

Corporate Travel Management Limited (CTD)

On January 4 Corporate Travel Management completed the acquisition of California based Montrose Travel. The acquisition of the 60 year old business means CTD now operates in 19 cities in the USA. The acquisition further helps CTD build scale and leverage in the States and becomes one of the top 12 travel companies in the US market.

The $47.6 million acquisition was funded through a mixture of cash, USD short term debt and stock (20 per cent to Montrose founders). The acquisition is expected to be earnings per share (EPS) accretive straight away. As a result, management increased guidance from approximately $63.8m to $68m for FY16.

This move has been welcomed all round by analysts and seen as a strong positive in tough economic times. The short term growth outlook isn’t too much to get carried away with though as the average 12 month price targets sit at $13.77, with the share price of $12.51 at the time of writing. Despite this, the long term vision is still good and the consensus on CTD remains a buy.

Investors are generally advised to buy Corporate Travel Management Limited at current levels.

Caltex Australia (CTX)

Just before the holiday break (December 17, 2015) Caltex gave the group's 2015 full year profit outlook. Operating profit is expected to be between $615m - $635m; marginally ahead of most analyst expectations.

Analysts are pleased with the result, particularly in the distribution and retail side of the business, and have also flagged the potential of M&A activity and speculated on a potential capital return. Management in the past had stated the potential for capital management.

Given the recent share price run for Caltex the consensus is currently a hold. The average 12 month price target is $37.61 and at the time of writing the share price sat at $36.17.

Investors are generally advised to hold Caltex Australia at current levels.

Primary Health Care (PRY)

It wasn’t just the government wielding the axe with the funding cuts to of pathology and diagnostic imaging as part of the mid-year economic and fiscal outlook (MYEFO). Analysts got in on the act too, cutting expectations on all diagnostic providers, Primary Health Care included.

The government's planned changes to bulk billing diagnostics have analysts anticipating a material impact on PRY earnings, which currently rely on bulk billing. Analysts have speculated PRY may look to increase charges on private billing.

The true impact on the business remains unknown, but despite this the market has seen analysts cut their forward looking price targets with the bulk being reduced back to the mid to high $2 level. At the start of the month of December the price targets were in the high $3s and low $4s. Currently the 12 month average price target is $2.81 with a $2.345 share price at the time of writing. There have been a handful of downgrades and most analysts now have PRY as a hold.

Investors are generally advised to hold Primary Health Care at current levels.

Sonic Healthcare Limited (SHL)

Sonic Healthcare is in the same boat as Primary Health Care regarding the announced funding cuts in the MYEFO. The analyst coverage remains the same as above, but analysts still prefer SHL over competitor PRY.

SHL management gave an announcement on December 15 addressing the changes and the impact on the business, stating an overall potential impact of on EBITDA of approximately 5 – 6 per cent for FY17.

If the changes do go through SHL will offset earnings with higher patient co-payments to more patients and reductions in service levels predominantly in rural areas.

Analysts have marginally cut their price targets with the average falling from $21.50 to $19.72.

Investors are generally advised to buy Sonic Healthcare Limited at current levels.

Domino’s Pizza Enterprises Limited (DMP)

The Domino’s Pizza juggernaut rolls on with yet another European acquisition shortly after the acquisition of Pizza Sprint in France - this time it’s the German chain Joey’s Pizza, with a network of 212 stores. 

The acquisition, which is a joint venture with Domino’s Pizza Group plc with DMP owning two thirds, has been seen as a strategically sound move by analysts. The acquisition, which cost $69m plus a $52m earn out, further cements Domino’s position in Europe.

On top of this Domino’s also upgraded earnings guidance with a 30 per cent increase on FY15 for FY16.  The acquisition will immediately be EPS accretive.

Analysts all raised their 12 month price target with the average now sitting at $53.94. The consensus is split between buy and hold for this exceptional business with four buys, five holds and just the one sell call. At the time of writing the share price was $56.

Investors are generally advised to hold Domino’s Pizza Enterprises Limited at current levels.