The share price of BlueScope Steel Limited (ASX: BSL) is making a tentative recovery after yesterday's 22% drubbing. Is this a buying opportunity?
Investors hit the panic selling button after management gave a softer-than-expected 1H FY18 outlook, announced the departure of its much-loved chief executive Paul O'Malley, and a cartel investigation against the company by the competition watchdog.
The stock was arguably primed for the sell-off given that BlueScope's share price is up by more than a third over the past year and a whopping 2,789% over the past 5 years.
It's been a heady run for shareholders as O'Malley did a remarkable job putting the company on its current growth path and BlueScope's latest set of tribulations aren't enough to dissuade top brokers from changing their bullish views on the stock.
For instance, UBS thinks the sharp sell-off is overdone even though management's 1H FY18 earnings before interest and tax (EBIT) guidance of $422 million was well behind the broker's $550 million forecast.
UBS thinks most of the factors weighing on short-term earnings are transitionary and the company's FY19 earnings are only going to be impacted by around 5%. This has prompted the broker to cut its target price on BlueScope to $14.25 from $15 a share, and that still leaves plenty of upside for the stock given that it's trading 4.9% higher at $11.56 in the late afternoon.
The analysts at Citigroup also see the near-term earnings weakness as "temporal and not structural". The broker said that weaker spreads in BlueScope's US Northstar business and the impact of higher energy costs were already factored into its estimates.
The other factors such as the higher Australian dollar making imported steel more competitive and higher raw material costs in the first half of the current financial year will pass according to Citigroup, which has a "buy" rating on the stock and a price target of $15.46 a share (down from $17.16).
Macquarie Group Ltd (ASX: MQG) has also reached much the same conclusion with the broker describing the bad news as a "speed bump". The broker also kept its "outperform" recommendation on the stock although it made bigger cuts to its earnings forecast to bring its price target down to $12.40 from $14.30 a share.
Interestingly, there was no mention about the Australian Competition & Consumer Commission's (ACCC) investigation into the company in the broker notes. Perhaps that is not too surprising as it's hard to work out the impact as the investigation is ongoing and could take a while to complete.
Nonetheless, it will be something that will weigh on the minds of investors and is likely to prevent the stock from reaching the price targets given by brokers.
Fortunately, there are other attractively priced large cap stocks that don't have this regulatory overhang.
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