MW: Australia earnings risk makes stock picking key
By Sarah Turner, MarketWatch
SYDNEY (MarketWatch) — Earnings risks hang over Australian companies, according to portfolio strategists at Citigroup, a factor they said makes stock selectivity key.
“With valuations fairly even, selecting sectors and stocks comes down to where earnings might exceed expectations versus where they might disappoint,” they said.
The strategists zeroed in on the likely performance of the banking and mining sectors, which dominate the Australian equity market.
They expect both to continue to outperform in the next year, “as the commodity boom extends, and as the banks benefit from their engagement across the breadth of the economy.”
Citigroup’s recommended portfolio of Australia companies is weighted 31% to the mining sector and 40.5% to financial firms. Still, within the banking and mining sectors, some companies are likely to be better investments than others, they believe.
The strategists said that mid-cap miners have shown more share price appreciation than the major mineral extractors and are starting to look more fully valued than sector giants such as Rio Tinto Ltd. (AU:RIO 83.53, -1.19, -1.41%) , (RIO 67.24, -0.50, -0.74%) and BHP Billiton Ltd (AU:BHP 43.14, -0.74, -1.69%) (BHP 86.60, +0.01, +0.01%) , which are both buy-rated by the broker.
BHP Billiton makes up 19% of the broker’s porfolio, while Rio Tinto represents 7% of the broker’s recommended portfolio. These firms are still at a significant discount to normal multiples “reflecting caution toward their elevated earnings” the broker said.
In contrast, Citigroup has a sell rating on smaller mineral extractors Macarthur Coal Ltd. (AU:MCC 12.09, -0.25, -2.03%) (MACDF 12.09, -0.04, -0.33%) , Oz Minerals Ltd. (AU:OZL 1.63, -0.08, -4.41%) (OZMLF 1.72, -0.01, -0.58%) and Alumina Ltd (AU:AWC 2.02, -0.05, -2.42%) (AWC 8.18, -0.10, -1.21%)
Macarthur Coal shares declined 1.1% on Tuesday. Oz Minerals shares were down 2.7% and Alumina shares lost 1.5% on Tuesday. Rio Tinto shares were down 1% and BHP Billiton shares were down 1.2%.
On the banking side, the broker has Australia & New Zealand Banking Group Ltd, (AU:ANZ 22.34, -0.14, -0.62%) (ANEWF 22.45, -2.55, -10.20%) and National Australia Bank Ltd. (AU:NAB 23.56, -0.44, -1.83%) (NAUBF 23.95, 0.00, 0.00%) at buy, while it rates Westpac Banking Corp. (AU:WBC 21.31, -0.41, -1.89%) (WEBNF 21.05, -0.28, -1.31%) and Commonwealth Bank of Australia (AU:CBA 48.18, -0.55, -1.13%) (CBAUF 48.25, -0.20, -0.41%) at hold.
ANZ represents 13% of the broker’s recommended portfolio while NAB makes up 12% of the portfolio.
“We are advocating a moderate above-index position in the banks, but with positions concentrated in ANZ and NAB, the majors for whom business lending is a larger share of assets, and for whom there still seems potential for the greater earnings and valuation improvement,” the broker said.
The strategists said that mid-cap miners have shown more share price appreciation than the major mineral extractors and are starting to look more fully valued than sector giants such as Rio Tinto Ltd. (AU:RIO 83.53, -1.19, -1.41%) , (RIO 67.24, -0.50, -0.74%) and BHP Billiton Ltd (AU:BHP 43.14, -0.74, -1.69%) (BHP 86.60, +0.01, +0.01%) , which are both buy-rated by the broker.
BHP Billiton makes up 19% of the broker’s porfolio, while Rio Tinto represents 7% of the broker’s recommended portfolio. These firms are still at a significant discount to normal multiples “reflecting caution toward their elevated earnings” the broker said.
In contrast, Citigroup has a sell rating on smaller mineral extractors Macarthur Coal Ltd. (AU:MCC 12.09, -0.25, -2.03%) (MACDF 12.09, -0.04, -0.33%) , Oz Minerals Ltd. (AU:OZL 1.63, -0.08, -4.41%) (OZMLF 1.72, -0.01, -0.58%) and Alumina Ltd (AU:AWC 2.02, -0.05, -2.42%) (AWC 8.18, -0.10, -1.21%)
Macarthur Coal shares declined 1.1% on Tuesday. Oz Minerals shares were down 2.7% and Alumina shares lost 1.5% on Tuesday. Rio Tinto shares were down 1% and BHP Billiton shares were down 1.2%.
On the banking side, the broker has Australia & New Zealand Banking Group Ltd, (AU:ANZ 22.34, -0.14, -0.62%) (ANEWF 22.45, -2.55, -10.20%) and National Australia Bank Ltd. (AU:NAB 23.56, -0.44, -1.83%) (NAUBF 23.95, 0.00, 0.00%) at buy, while it rates Westpac Banking Corp. (AU:WBC 21.31, -0.41, -1.89%) (WEBNF 21.05, -0.28, -1.31%) and Commonwealth Bank of Australia (AU:CBA 48.18, -0.55, -1.13%) (CBAUF 48.25, -0.20, -0.41%) at hold.
ANZ represents 13% of the broker’s recommended portfolio while NAB makes up 12% of the portfolio.
“We are advocating a moderate above-index position in the banks, but with positions concentrated in ANZ and NAB, the majors for whom business lending is a larger share of assets, and for whom there still seems potential for the greater earnings and valuation improvement,” the broker said.
