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Why Citi downgraded CSL Limited (ASX:CSL) & upgraded Primary Health Care Limited (ASX:PRY)

It’s almost unthinkable but it may be time to lock in some profits by selling blue-chip superstar CSL Limited (ASX: CSL) and buy long-time underperformer Primary Health Care Limited (ASX: PRY), according to Citigroup.

This call is made even more controversial because consensus has Primary Health as a “sell” or equivalent, while most brokers rate CSL a “buy”.

The upgrade from Citigroup may be helping the share price of Primary Health, which jumped 2.5% to $2.88 in after lunch trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 0.1%, but investors may also be excited at the news that Primary Health is acquiring Montserrat Day Hospitals for up to $138.5 million (subject to Montserrat achieving some milestones).

Citi’s upgrade didn’t take the latest acquisition into account and its decision to lift its recommendation on the stock by two notches to “buy” from “sell” is due to the company’s latest capital raising and last month’s full year result.

“We were nervous about the quality of the result, and also about the outlook into FY19. This was justified as the company downgraded FY19 NPAT by 9% and launched a $250m rights issue,” said Citi, which has a $3.20 price target on the stock.

“With a fresh look, we believe that with minimal gearing, and the ability to reinvest in the business, the valuation looks relatively attractive versus the rest of the sector.”

As it turns out, Primary Health is quick to put funds from the rights issue to work though this acquisition, although that probably doesn’t change Citi’s new take on the stock given that management is forecasting FY19 net profit to be at or above $100 million.

That contrasts with the guidance given when it handed in its FY18 earnings report card when it predicted FY19 net profit to be at or above the $92.3 million it posted in the last financial year.

Investors could fund the investment by selling some of their shares in blood plasma supplier CSL. Citi has downgraded the stock to “neutral” from “buy” after the stock rallied by more than 50% since the start of this calendar year.

There’s plenty to like about CSL, but it feels a little too rich for my blood (no pun intended) and I am growing warier of high price-earnings (P/E) stocks. I think value stocks will start overtaking these premium stocks as we head into 2019.

One such value stock that could do well alongside Primary Health is medical consumables maker Ansell Limited (ASX: ANN), as the broker also upgraded the stock to “buy” from “neutral” with a price target of $28.50 a share, even though management disappointed with its profit results last month.

“Elevated raw material costs resulted in a slight miss to guidance, and the FY19 outlook was ~6% lower than consensus,” said the broker.

“Post the underperformance, we upgrade to a Buy, predominantly on the optionality of the ungeared balance sheet, and our view that raw material prices will likely normalise in 2H19.”

There are three other blue-chip stocks that are likely to outperform in FY19 too, according to the experts at the Motley Fool.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ansell Ltd. 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 Scott Phillips.

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