MARKETS SPECTATOR: Woolies over Wesfarmers

JP Morgan bumps Wesfarmers in favour of Woolworths and also moves OZ Minerals to overweight despite ongoing market concerns.

Investment bank JP Morgan this morning issued a downgrade for conglomerate Wesfarmers, lowering its rating to underweight from neutral while lifting its target price to $34.45 from $31.93.

"Recent share price performance has seen Wesfarmers outperform the ASX 100 by 12.1 per cent and 12.7 per cent since January and July 2012, respectively, as well as outperforming its large cap consumer staples peers Woolworths, Coca Cola Amatil and Metcash over these periods," JP Morgan noted.

JP Morgan said that despite the attractive elements of the investment thesis, the current share price is trading at a significant premium to the brokers discount cash flow valuation. It also believes that the Coles turnaround remains on track as does the performance of Bunnings, which continues to track well.

The investment bank makes a point that it sees no imminent downside catalyst, especially given the strong demand for high yielding equities with earnings growth. However, at current prices it just doesn’t offer the right risk/reward scenario JP Morgan looks for. In the consumer staples space, Woolworths is the broker's preferred exposure.

Elsewhere, JP Morgan upgraded OZ Minerals to overweight from equal weight while lowering its target price to $8.30 from $9.20 per share.

"Over the past six months, OZ Minerals has fallen 10 per cent while Sandfire Resources is up 20 per cent and PanAust is up 38 per cent. While we acknowledge market concerns around growing cash costs, and relatively short mine life, we believe these issues are accounted for in the share price. With the stock offering almost 20 per cent upside to our revised NPV based target, we upgrade our recommendation to overweight,” the broker wrote in a report.

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Source: Iress

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