MARKETS SPECTATOR: Wielding the axe on QBE

QBE's sinking share price paints an ugly picture and as brokers take measure, it seems the best the stock can hope for is a sideways consolidation phase.

After yesterday’s clobbering from the market, the brokers look to be having their pound of flesh today through downgrades.

UBS has this morning issued a research note, downgrading QBE to neutral from buy and lowering its target price by 13 per cent to $12.50 from $14.50.

The phrase ‘internal confusion – how can investors be expected to form a view?’ says it all.

"Whether today’s profit warning was the new chief executive’s second attempt at rebasing or a genuine reflection of recent deterioration will not be known for some time.

"Either way, QBE’s key messages this year have become too inconsistent and confusing to unravel logically.

"Accordingly, we’ve opted for conservatism (we think) in the drivers of our 2013 insurance margin (13.6 per cent to 11.7 per cent), a 15 per cent EPS downgrade”, UBS said.

The view on the street is clearly being clouded by the way the new chief executive is communicating with the investment community. The company is fast losing the confidence of investors and it’s going to take some serious improvements in visibility to repair the damage. Markets hate uncertainty and when management isn’t doing anything to help, participants will soon lose complete confidence and put the stock in the ‘too hard basket’.

UBS wasn’t the only broker to wield the axe on QBE. Morgan Stanley seem to have lost patience as well, cutting the insurance giant to equal-weight from overweight and lowering its target price to $12.70 from $14.30.

The broker noted that despite superstorm Sandy delivering bigger-than-expected losses, the real damage has been done by the strengthening of US reserve requirements and the $US0.5 billion debt raising. To rebuild confidence, Morgan Stanley said QBE needs a clean end of year result.

image
Source: Iress

The above weekly chart of QBE paints a pretty ugly picture. The stock is firmly embedded in a long-term downtrend, and to be brutally honest is showing no signs of improvement. The focus in the coming weeks is going to be on whether or not it can remain above the major support level labelled. If it can, then it’s likely to remain in a sideways consolidation phase for some time to come.

If it breaks to the downside, then it could easily slip much lower as the investment community abandons the stock further, choosing to focus its attention on businesses that are much more transparent.

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