Collected Wisdom

In this bumper edition we look at Carsales, Baby Bunting, Amcor, Virgin, ASX, Cochlear and more.

Summary: Carsales solid growth is pleasing analysts, and while Baby Bunting is not cheap, its competitive advantage sees a buy consensus on the stock. Cochlear’s half-year results get mixed reviews, profits are down at Computershare and BlueScope’s cost cutting looks like it will contribute to longer term profitability.

Key take out: Baby Bunting’s first report has beaten expectations and pleased analysts, with earnings growth at 50 per cent. 

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.

Carsales.com Limited (CAR)

Carsales.com is another one of those stocks where the puns flow freely, an appropriate one for this report would be “cruising”. CAR beat the majority of analyst expectations with its half-year numbers released last week (February 10).

CAR management were pleased to announce solid growth, with revenue up 11 per cent and EBITDA up 12 per cent on the prior corresponding period. Good growth was reported in the finance division off the back of Strattons, of which CAR owns 50 per cent.

Analysts like management’s approach to setting up the international side of the business with long term growth prospects. Investments in Asia and Latin America look to be longer term drivers of growth.

Currently the share price is in line with the average 12 month price target of $11.93. Despite this, the ledger just tips over to a buy with five out of nine analysts favouring the longer term outlook.

Investors are generally advised to buy Carsales.com at current levels.

Baby Bunting Group Limited (BBN)

The recently listed supplier of baby goods gave its first report to the market on Friday last week. Despite being new to the market the group is quickly picking up fans among the analysts, with all who cover the group doting on the company over the result.

The group's first report beat expectations, with earnings growth coming in at 50 per cent. Management updated the market on full year guidance as well, pointing towards strong numbers again with year to date comparable store sales increasing by 11.2 per cent. Management also anticipate opening another five to six new stores in FY16. This would take the total number of stores to 36 or 37.

All analysts agree the stock is not cheap. Baby Bunting has come out of the gates very strongly, debuting at $1.885 in October and now trading at $2.45 at the time of writing. Analysts have warned this means BBN management cannot afford a slip up but this has not deterred them from all having a buy call on it.

All analysts pointed towards the competitive advantages Baby Bunting has when it comes to scalability compared to its peers, as well as the regulatory requirements in the industry acting as a moat for international players.

The current average 12 month price target for BBN is $2.78, with the current share price at $2.46.

Investors are generally advised to buy Baby Bunting Limited at current levels.

BlueScope Steel Limited (BSL)

BlueScope management gave the market a heads up issuing preliminary numbers on Friday February 12. On unaudited numbers management anticipate earnings to come in at $230 million, which is $50m above previous guidance. This has been achieved by stronger domestic demand and cost reductions.

This one page announcement has the steel maker once again pleasing investors and analysts alike. Analysts remain positive as they believe this run rate from management can be maintained into 2017. Analysts anticipate further cost outs and continued strength in Colourbond sales will continue to drive earnings growth.

The consensus remains a buy for BSL with the 12 month average price target sitting at $5.69. At the time of writing the share price was $5.12. This is a 10 per cent implied upside to the current share price for the steel manufacturer.

Investors are generally advised to buy BlueScope Steel Limited at current levels.

ASX Limited (ASX)

On the whole, ASX beat consensus expectations with its report but it is the forward outlook that is more challenging and has cooled analyst expectations. With its interim report the operator of the market reported modest growth in revenue, up 7.9 per cent and earnings per share up 7.3 per cent.

Expenses increased 5.5 per cent for the year as the ASX invests further in post-trade services, the first of which investors will experience when settlement shortens by one day. Further investment will also be made in product development for derivatives and OTC (over the counter) markets.

The revenue growth came from strong markets and listings in the first half with a number of IPOs and large capital raisings. However, given the much reported downturn in capital markets, analysts expect far less IPO activity and general turnover. 

Expectations remain neutral for ASX; the company has a solid balance sheet but a subdued outlook leaving analysts to maintain a hold call. The share price at the time of writing was sitting just a fraction below the average 12 month price target at $40.14. The price target is $40.66.

Investors are generally advised to hold ASX Limited at current levels.

Cochlear Limited (COH)

Cochlear released its half-year results last week (February 11) and saw a sharp incline in its share price as a result. The result was strong with net profit up 32 per cent and the dividend rose by 22 per cent.

The hearing aid manufacturer was a beneficiary of the movement in the Australian dollar and that is set to continue into in the back half of the year with COH giving guidance of $180 - $190m. This guidance is up 23-30 per cent on FY15.

Analysts were mixed with their view of the results and outlook. Those positive on the company pointed towards the market growth prospects with over 5 per cent of the world's population experiencing disabling hearing loss and COH having less than 5 per cent of that total potential market. Those analysts more neutral on COH pointed towards the earnings growth to be a result of just the market growing instead of COH actually gaining more market share.

Similarly, analysts were not overly positive on Cochlear’s customer first focus, suspicious of whether this will result in earnings growth. The thought is it could impact operating margins.

The analysts are on the fence with COH settling on a hold. The average 12 month price target is $97.51 with the share price at the time of writing sitting on $105.22. The most bullish case from one analyst weighs in at $120.

Investors are generally advised to hold Cochlear Limited at current levels.

Computershare Limited (CPU)

Profit was down 10.5 per cent on the prior corresponding period and a weakening operating environment looking forward has analysts calling Computershare a hold.

With the half year results CPU management reiterated previous guidance with the strength in the US dollar and lower client yields leading to a decrease of 7.5 per cent on management EPS for the full year when compared to FY15.

CPU management point towards the mortgage services initiatives to drive future growth, but analysts are sceptical and believe it will take investors time to warm to the idea. Right now it appears CPU is a victim of the soft operating environment going forward. But saying this, the bulk of analysts are in agreement to hold Computershare.

The average 12 month price target currently sits at $10.49 with the share price currently sitting at $9.19.

Investors are generally advised to hold Computershare Limited at current levels.

Virgin Australia Holdings (VAH)

The Virgin results came in line with analyst expectations. The overall feeling was the results were ok. The result was an improvement on the prior corresponding period with the lower cost of fuel helping the result along. It is expected the true benefits of the lower fuel prices to come through in FY17.

Cash flow was the main point highlighted by analysts. Cash flow for the first half came in at -$133m. This is due to investment capex. Despite analysts highlighting this, they did not seem too concerned by it as the balance sheet is improving.

Tiger reported profitably as well with underlying EBIT improving to the positive territory at $13.9m for HY16 as opposed to -$24.8m in HY15. The main story will be a familiar one in the environment with management looking for further cost outs to grow earnings. Management reiterated the group is on track for its targeted $1.2bn in cost savings by FY17.

It is a hold all round for Virgin with the average 12 month price target of $0.51. At the time of writing the share price was $0.472.

Investors are generally advised to hold Virgin Australia Holdings at current levels.

Oz Minerals Limited (OZL)

The miner hit some, exceeded others and fell short of one or two analysts’ expectations with its full year results announced last week. What was a surprise and had all analysts talking was the dividend. Management handed down a 14 cent dividend, taking the full year dividend to 20 cents.

The upgrade to 2016 guidance also surprised analysts. Copper production is expected to be between 115,000 to 125,000 tonnes – an increase on previous guidance of 10,000 tonnes and gold increased to between 125,000 to 135,000 tonnes up by 25,000 tonnes.

The uncertainty that analysts are looking for clarity on is what Carrapateena will mean for OZL and it looks like they won’t have long to wait, with management noting the announcement is “imminent”. An announcement regarding the copper/gold deposit bought by OZL in 2011 will give analysts more clarity around capital expenditure. Analysts positive on OZL (and there are a number of them) believe the market is not pricing in Carrapateena.

The 12 month average price target for OZL is $4.93 with the share price at the time of writing sitting at $4.89. The most bullish case among analysts is set at $7.88 and you could presume this includes the presumption of positive news surrounding the Carrapateena announcement. The most bearish is $3.27.

Investors are generally advised to hold Oz Minerals Limited at current levels.

AGL Energy Limited (AGL)

Australia’s largest utilities business (by market cap) released half-year numbers broadly in line with analyst expectations. Underlying profit was up 17 per cent and management increased the dividend by 2 cents, making it 32 cents per share.

Management gave guidance towards the upper half of $640m – $720m. Analysts are pleased with the earnings outlook and solid cash flow as well. Expectations are for growth to be driven off the back of increasing electricity prices which will increase earnings through FY17-18.

Analysts have AGL as a hold at the moment, with a handful downgrading from a buy based purely on a fully valued share price. The share price at the time of writing was $18.31 with the average price target of $19.23. There does not appear to be much downside in the near term as the most negative analyst had a price target of $17.70.

Investors are generally advised to hold AGL Energy Limited at current levels.

Amcor Limited (AMC)

The packaging giant released its numbers this Monday and managed to surprise analysts beating the consensus figures by 7 per cent. Leading the way for Amcor was strong growth in rigid plastics and surprisingly in tobacco packaging.

It was an impressive result set amongst a backdrop of weak emerging markets and impactful currency movements. The tobacco result surprised as regulations on packaging continue to tighten globally. 

Amcor announced the completion of its share buyback. Management have also flagged further acquisitions. The result combined with guidance from the company drove analysts forward looking earnings estimates upwards.

Right now the share price is trading just below the price target of $14.67 at $13.56 at the time of writing. Analysts have a buy on this high quality plastics business, even with the jump in the share price after the result.

Investors are generally advised to buy Amcor Limited at current levels.

Bendigo & Adelaide Bank (BEN)

BEN either equalled or fell short of individual analyst expectations after the release of the half yearly numbers. It was widely commented on by analysts that earnings were significantly propped up by BEN’s Homesafe solution.

Homesafe, and Bendigo’s potential reliance on earnings from the reverse mortgage product was flagged as a potential issue as it could overshadow larger issues of almost non existent growth and lower margins.

Despite the commentary from almost all analysts being quite subdued and with one analyst even calling the result “operationally weak”, the consensus of the calls still remains a hold. One analyst commented the reasoning for this was the stock had already been sold off and maintained the hold call at current levels.

The price target has been decreasing with the share price. The target is sitting at $10.02 with the share price at the time of writing sitting at $8.79.

Investors are generally advised to hold Bendigo and Adelaide Bank at current levels.

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