Top broker names outstanding share pick for 2016

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According to the Fairfax press, Credit Suisse’s research team believes stocks should rise approximately 15% in 2016, with the S&P/ASX 200 Index (ASX: ^XJO) forecast to hit 6000 by December next year. In a research note, Credit Suisse rated Lend Lease Group (ASX: LLC) as one of its top stock picks for 2016, citing overly pessimistic markets as the cause for the company’s current underperformance.

Here is why I think Credit Suisse is correct.

The investment thesis

Credit Suisse believes the market has priced Lend Lease on a very weak outlook.

As a matter of fact, the contrary appears true, with Lend Lease boasting development pipelines of $45 billion and $17 billion across various property and construction projects respectively. In 2015, Lend Lease doubled pre-sales revenue on the back of the housing boom. These revenues are only expected to flow to earnings and profit from 2016 onwards, indicating that the group should maintain profits (at the very least) in the coming years.

The company

Lend Lease is Australia’s leading property and infrastructure developer, specialising in large scale project management and infrastructure construction projects. The group operates throughout Australia with a significant presence in Asia, America and Europe, providing it with solid exposure to an array of emerging markets and developed nations.

Locally, Lend Lease relies on property development and infrastructure projects and its Australian business provides the biggest contribution to group earnings. However, with signs of the housing boom coming to an end, concerns have arisen around Lend Lease’s ability to pursue sustainable growth.

In the 2015 financial year, the group expanded its presence in international markets with greater investments in pipeline opportunities in Asia, America and Europe to target growth. The result was an increase of circa $8 billion of new major urban regeneration projects in Asia and America, placing the company on a strong footing to grow internationally over the medium term.

The fundamentals

Lend Lease shares have slumped 26% from their 52-week high posted in February this year.

Its shares currently trade on a price-to-earnings ratio (PE) of 12, which is below its long-term average. Although Lend Lease’s PE compares favourably to listed peer CIMIC Group Limited (ASX: CIM), it is marginally higher than property developers Mirvac Group (ASX: MGR) and Stockland Corporation Ltd (ASX: SGP). However, unlike the latter duo, Lend Lease offers diversification across different sectors and countries, thus, in my opinion, it should command a higher multiple than its competitors.

Lend Lease posted a net profit after tax of $618.6 million in 2015 and offers a trailing dividend yield of 4.1% (partly franked) at current prices. As such, the recent pull back in price presents an excellent opportunity for investors to be rewarded with growth and income over the medium term.

Foolish takeaway

Although risks remain around Lend Lease’s ability to grow earnings given the global economic outlook, Lend Lease appears to be taking the right steps to ensure sustainable long-term growth. Accordingly, with Lend Lease currently trading at a discount to its long-term PE, I believe a purchase at today’s prices would compensate investors for those risks.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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