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 MARKET REPORTS |
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Analyst report - stocks
Reporting season: beaten down stocks to watch
September 24, 2007
Brendon Lau, ShareAnalysis
 As with any reporting season, good or bad, there will be some companies left holding the wooden spoon. These companies have issued news that has disappointed the market and were subsequently sold down. Is this a buying opportunity? We help you navigate this minefield to separate the buys from the busts.
One of the dominant themes these past weeks has been housing. The US housing sector is unlikely to recover until CY09 earliest, and, thanks in part to the US sub-prime contagion, Australia’s housing sector is under a cloud. Australian residential construction is trending down and there are signs that potential buyers are put off by the rising cost of debt. These factors are weighing on Boral (BLD).
BLD issued FY07 results that were 18% lower than those for FY06 and just shy of our forecast. BLD was reluctant to give specific guidance, but it is clear that the outlook across most of BLD’s divisions will remain challenging over the coming year.
Other stocks exposed to the local residential market are suffering as well. Wattyl’s (WYL's) FY07 result was significantly below our expectations, and CSR (CSR) has recently issued a 5% profit downgrade.
CSR has attributed this decline in profit to the softening in international sugar prices, and its sugar milling business is seeing further margin pressure. Operating conditions are challenging for CSR’s building products segment, but recent acquisitions of Pilkington Glass and DMS Glass have created growth prospects for the division. There has also been some concern about the need for CSR to divest some businesses to remain competitive, and the market continues to speculate on what form these changes will take.
Meanwhile, Boom Logistics (BOL) and Commander Communications (CDR) issued downgrades of their own. BOL downgraded its FY07 result in July due to harsh weather conditions and equipment shortages, but still managed to beat its FY06 result by 11%. Bad weather can be treated as a one-off, but equipment shortages are likely to impact the company for the medium term. Despite this, we remain upbeat about the growth potential of this emerging mid cap and note there is still ample scope for consolidation in the fragmented lifting solutions market.
The issues afflicting CDR are unfortunately more complex. Management has lost credibility after issuing two profit downgrades and its shares have nosedived dramatically. CDR seems to have miscalculated the implementation of its franchise model and it lost market share due to integration issues with its order processing systems after buying over Volante. While CDR’s position remains precarious with substantial debt levels and a seasonal revenue stream, it has a well-recognised brand with revenue streams in excess of $1B. However, with market sentiment against it and management under question, we take a cautious stand on CDR.
Finally, in the mining sector, production hiccups have cost Paladin Resources (PDN) dearly. Its Langer Heinrich operations only produced 119,586lb of uranium (U308) for FY07, significantly below its original forecast. As a result, PDN had to purchase 250klb of U308 to meet contractual obligations. Rubbing salt into the wound, PDN paid US$133/lb for the yellowcake, which is close to the price peak for U308. U308 has plunged over 30% since, to around US$90/lb. Despite this setback, we see upside potential for the stock.
More articles from this week's CompareShares newsletter:
Stocks: Five stocks not exposed to US downturn
CS stock lab: Guide to analysing stocks
Managed Funds: Smart funds for hardened share punters
Resident Trader: Low-risk forex trading
Smart investing: A safe haven in stormy times
Analyst report: Beaten down stocks to watch
Commodities: Gold set to continue its run
Stock of the week: Swick Mining Services
Options: Become a better share trader by understanding options
Brendon Lau is the editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research.
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
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