Collected Wisdom

PORTFOLIO POINT: This is an edited summary of Australia's best-known investment newsletters and major daily newspapers. The recommendations offered represent the views published in other publications and may not represent those of Eureka Report.

Wesfarmers (WES). There’s plenty to like and dislike about the profiles of Wesfarmers’ diverse investments, and its annual 'Strategy Day’, held last week, provides a good opportunity to assess each of them. While there are headwinds and uncertainty in some areas, the general view of the investment press is one of sufficient long-term upside in this unique company.

Wesfarmers shareholders are essentially exposed to supermarket retail, through Coles; discount department store retail, through Kmart and Target; hardware via Bunnings; resources, particularly high-value metallurgical coal; and chemicals and fertilisers. Each of these sectors faces different pressures and potential for growth, so the business is something of a risk composite.

Coles confirmed that CEO Ian McLeod will stay with the company after the first five years of his contract with the 'new’ Coles under Wesfarmers ends next May, and this is being viewed as a major positive. Coles has consistently and effectively stepped up as a real competitor to Woolworths in that time, and while it still lacks the size and momentum of its larger rival, it is now leading in terms of growth on almost every metric. As discussed, competition in customer data is heating up and the price war between the majors is far from over.

A $30-40 million restructuring of Target was a surprise negative, but the strong recovery of Coles and Wesfarmers had hidden some warning signs from the mid-level department store recently.

On the coal side of things, plans to lift export capacity are apparently progressing well, with growth predicated on steelmaking demand in emerging economies. Despite talk of slowdowns, demand is not expected to peak until after 2020 and plans are to lift exports from both the Curragh and Bengalla mines above 10 million tonnes per annum.

The Wesfarmers composite model allows for a range of exposures, and is set up to deliver long-term value and growth, something the newsletters only see strengthened by last week’s strategy updates.

• Investors are advised that Wesfarmers is a long-term buy at current levels.

Seek (SEK). According to the Wall Street Journal’s deals blog, Seek is the Australian stock most covered by equities analysts. In May, 17 analysts were apparently devoting some time and attention to the online employment classifieds company – and they generally see it pretty favourably. The investment press agrees.

Seek last week lifted its stake in two emerging markets, increasing ownership to take control of Brasil Online in Brazil, with 51% of the company, and Online Career Centre in Mexico, with 57%. The move is set to cost the company just over $100 million – split $78.8 million and $22.5 million respectively. Both will be consolidated into Seek’s financial statements and are expected to be earnings accretive in FY13. The remaining stakes in both these businesses are held by Tiger Global, a US fund manager that was part of the consortium which bought into Catchoftheday.com last year.

The company first invested in Brazil in 2008, and then Mexico in 2010, taking 30% and 40% stakes to gain position in markets where internet penetration remains significantly below Australia. More than 80% of households in Australia have internet access, compared with 30-40% in Mexico and Brazil, but the newsletters point out that there is plenty of growth room left “down under” as job advertisements continue to move from print to online.

Seek has been one of the standout performers on the ASX in terms of earnings, and posted strong growth in dividends, earnings per share, and net profit when it last reported in February. Continued expansion in all these areas is expected to continue for several years, with full-year net profit next month expected to rise in the region of 25%. Offshore expansion in China more than doubled this division's contribution to profit growth.

The migration of classified advertising online in Australia may be maturing, and there is potentially strong competition emerging from social media services such as LinkedIn. But, at present, the only thing holding many observers back from a 'buy’ recommendation is strong share price performance – Seek shares are up almost 20% year-to-date, even with the market’s recent ructions.

• Investors are advised to hold Seek at current levels.

Emeco (EHL). Much has been said about the relative benefits of the mining services sector, and how a possible slowdown in Chinese demand could affect it. But for investors willing to bear a bit of risk, the newsletters are bullish about Emeco.

The company rents earthmoving equipment to miners, predominantly in Australia and Indonesia, and its fleet usage rates have remained high over the past two years at about 85%, which is almost considered fully utilised. Full-year profit guidance has been given in the range of $67-70 million, a gain of almost 25% on the prior year’s $55.7 million.

Moreso, mining activity remains strong despite concerns of a slowdown. Emeco is diversified across the surface-mined commodities, and as a result is less exposed to changes in individual commodity demand. It is also diversified geographically, with operations in Canada, Chile and Indonesia providing wider commodities and industry profiles. Copper mining ramping up in Chile is expected to be a major positive for the company.

However, the broader commodities picture remains a risk for the company's activities. Capex is high for fleet maintenance and upgrades and, as a result, debt levels are very high as well. The serious and extensive expansions by the larger Australian miners are presently providing a very strong future outlook for the full use of Emeco's fleet, but major disruptions in too many of these planned expansions would be a problem.

Fully-franked dividends, and earnings per share, are forecast to increase by more than 20% each, and its earnings stability and dividend yield are above-average for the sector.

Emeco has also shown resilience to downturns through the end of the first wave of the mining boom, where it quickly cut costs and pulled out of unprofitable markets. There is also the possibility of increased utilisation of rented mining equipment, rather than owned, as resources companies look to more effectively deploy capital and retain flexibility as conditions change.

This company is squarely set to be affected by a major commodities slump, but failing that it has the geographical and resource exposure diversification to remain promising – though further moves to diminish debt would be viewed favourably.

• Investors are advised Emeco is a high-risk buy at current levels.

ResMed (RMD). One of the most effective ways to become a market-leading company is to invent the market for your product to trade in – or failing that, discover it and spread the word. This is exactly how ResMed, a provider of medical products to treat sleep apnoea, has developed so well and retains promising growth potential.

Sleep apnoea, where sufferers stop breathing during sleep, is estimated to affect 20% of adults in the US, representing a huge undiagnosed market. The high incidence of the disorder, which is believed to cost nations billions of dollars a year in health and lost productivity costs, is linked to obesity, which is also rising.

ResMed’s third-quarter results released in late May are a testament to its success, and go some way to explaining why the share price has significantly outperformed the ASX benchmark this year.

Revenue rose 11% to $349 million for the quarter, while net profit lifted 21% to $64.6 million. The company is also being aided by the shift in the AUD/USD exchange rate, cutting down overhead costs in comparison to revenue generated in America.

One downside, or benefit depending on perspective, is ResMed’s lack of dividends at present, which obviously limits its yield somewhat. However the cash has gone into a share buyback, which boosted earnings per share, and is maintaining a very healthy (some say too healthy) cash balance of $540 million. The good news is that dividends are now expected to commence from the first quarter of fiscal 2013.

This is a company with a range of innovative products in a market that could grow quickly and significantly, where ResMed is well placed to take advantage of it. It has the cash and the culture to keep innovating, and its strong performance reflects this.

• Investors are advised to hold ResMed at current levels.

ThinkSmart (TSM). There are stocks the newsletters believe deserve to be sold, and then there are those they wish they’d never bought in the first place. ThinkSmart, which has announced a major profit guidance downgrade including a first-half loss, has become one of the latter.

As investors wiped 30% off the share price on Monday last week, executive chairman Ned Montarello was explaining to shareholders at the Perth AGM why a combination of a dire retail market and changes to the company's lease accounting model had seen things deteriorate quite so severely.

ThinkSmart is a consumer finance and warranty provider for electronics retailers, and this has been a sector under pressure. Worse, the company had a major contract with Dick Smith, which Woolworths has decided not to renew as part of its efforts to offload that chain, and this is weighing on ThinkSmart’s balance sheet. About $1.2 million of net profit is expected to be lost from this development, and coupled with the general retail malaise, first-half losses will be in the range of $2 million.

Profit last year of $6.8 million had been expected to be repeated since the release of guidance in February, though that number has become the more vague “materially lower than our earlier guidance”.

Consumers don’t appear to be about to rush out and buy high-priced electronics in droves any time soon, and Dick Smith has been hit deeper than most by its sale process – so even before the contract was lost, the revenues were drying up.

Worse for investors, this comes off the back of a $9 million equity raising three months ago at 35c a share (it closed at 20c on Friday), and even its own underwriter JPMorgan has deeply cut its outlook and forecasts on the stock.

If you're looking to bet on an electronics retail recovery, this stock looks cheap, but the newsletters are staying away.

• Investors are advised to avoid/sell ThinkSmart at current levels.

Watching the directors

Seven Group Holdings (SVW) shares have seen a lot of selling action since their 52-week high of $10.76 in April, closing at $7.85 today amid the market carnage. But a notable part of that selling last week was executive director Bruce McWilliam, who offloaded half a million shares in the company for almost $4.13 million, or $8.26 a share, as a cost collar expired.

Also selling was Michael Humphris at Tox Free (TOX), who readers may remember sold 50,000 in March and 750,000 shares in April in the hazardous waste management company. Last week, he sold a further 200,000 shares in the company for $2.46 each, or just under half a million dollars.

On the buying side, Chalice Gold (CHN) executive chairman Tim Goyder made the biggest splash of the week, picking up just over 4 million shares for $804,433 in three tranches, all close to 20c a share. The company’s share price has been in a steep decline throughout 2012, falling from near 30c at the beginning of the year to close at 21c today.

Other recent director movements include Bisalloy Steel Group (BIS) chairman Phillip Cave, who rid himself of 108,059 shares for more than $150,000, and Nucoal (NCR) managing director Glen Lewis, who bought 775,726 shares in the coal explorer for about $215,400. Nucoal’s share price is well off its March peaks of 34.5c, closing at 25.5c today, but the company last week announced it had signed a Japanese partner for its Doyles Creek coal project.