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Analysis
Stocks that beat leaving money in cash
April 14, 2008
Brendon Lau, ShareAnalysis
The market appears to be bottoming after the big rally last week. Investors who are sitting on cash that is returning around 8% p.a. must be wondering if the risk now justifies the returns for them to return to the market. While we think it is too early to say the worst is over, we can suggest a number of stocks that may be a better alternative to cash.
These are stocks that not only have very low levels of debt but also have businesses that generate substantial and sustainable cash flows. These companies also enjoy a strong market position that would likely see them weather any further fallout from the credit crisis.
BHP Billiton (BHP) is well positioned to benefit from our continuing strong outlook on metals and energy. Unlike many of its peers, BHP is practically debt free, with gearing of 9.3% (debt/(equity + debt)) for 2008 and an interest cover of nearly 37 times. If the mining giant is successful in buying fellow miner Rio Tinto (RIO), we do not believe its gearing would jump by much, as the offer is script based.
Also leveraged to the booming energy and mining space is, engineering services contractor WorleyParsons (WOR). The company is lightly geared at 23% and has an interest cover of 14 times for FY08. WOR has won a number of contracts recently and has even managed to improve its operating margins.
United Group (UGL) is another that would more than likely withstand the credit turmoil, as it has a modest gearing of 24.1%. Furthermore, CEO Richard Leupen has recently closed all of his margin loans over his UGL shares, to avoid the same fate as ABC Learning Centres (ABS). Investors will also likely warm to UGL's 4.5% fully franked dividend yield, which is forecast to rise to 5.7% in FY09.
Sentiment towards consumer discretionary stocks has turned sour since the start of the financial turmoil. However, two stocks we have bullish convictions on are Fleetwood Corporation (FWD) and David Jones (DJS). FWD has next to no debt but, like most companies, it is facing rising costs pressures and slowing in demand. While we are not ecstatic about the business or its growth prospects, FWD said it would continue to pay its special dividends for the next two years, subject to certain conditions. This means that the stock is yielding a fully franked dividend of almost 8%.
Meanwhile, DJS has a relatively modest gearing of just over 50% and an interest cover of almost nine times. Unlike some other retailers, its earnings are domestically driven and this means it is far less affected by jittery consumers in the US and Europe. Also, the strong Australian dollar is likely to benefit the company. At current prices, DJS is yielding a fully franked dividend of over 6.5%.
Finally, we believe Adelaide Brighton (ABC) has the potential to outperform any cash account over the short to medium term. ABC is the sole supplier of cement and cement-related products in SA, which is seeing a mini construction boom. ABC also continues to renew substantial contracts with the big players like BHP and has successfully increased prices in SA and WA in 1H07, with more earmarked for 2H07. The company is modestly geared at 33.8% for FY08 and has a forecasted fully franked dividend yield of around 8% p.a. for the next two years.
Brendon Lau is the editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research. Click here for your free trial.
More articles from this edition of CompareShares:
Investing: Is the big Asian sharemarket boom over, or has it just begun?
Shares: 5 Experts' 1-5 year outlook for the Aussie sharemarket
Resident Trader: Opes Prime mess: who owns your shares?
Investing: Stocks that beat leaving money in cash
Stocks: Stock of the Week – Saferoads Holdings
Analysis: What’s in store for the Aussie dollar and local equities?
CFDs: Top ten share CFDs for the week
Retirement: Global turmoil hits retiring baby boomers
Companies: Another Opes Prime? Lift Capital collapses
Superannuation: Aussies reluctant to put extra in super
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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