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Why this ASX stock looks set to buck the falling market today

The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is poised to follow Wall Street lower this morning but there’s one stock that could buck the market weakness.

Investors will be looking at the Codan Limited (ASX: CDA) share price performs today after the metal detector and industrial communications solutions company issued a profit upgrade after the market closed yesterday.

The Codan share price had fallen 1.9% on Wednesday to $3.19, taking its total gain since the start of calendar 2019 to just under 10% when the ASX 200 is up over 15%.

Big profit upgrade

Management reported that sales in the second half of FY19 is coming in ahead of expectations and the company now expects the current half to be as strong as the first half result. This means a big boost for its full year net profit guidance!

Codan is now forecasting net profit to hit $42 million to $45 million for the year compared to its earlier guidance of $25 million to $30 million.

Part of the strong showing can be attributed to sales of metal detectors with the company less reliant on the GPZ7000 gold detector after it developed a new platform that allowed the company to diversify their range of products for the gold and recreational segments.

The Communications division also contributed to the better than expected result after the company won a few new contracts. This means this business will generate sales at the top end of the base-level sales range of $75 million in FY19.

But Codan isn’t firing on all cylinders. It’s Minetec business will not meet sales expectations for the current financial year and will incur a small operating loss even though it successfully completed a trial using its technology and Caterpillar’s Minestar system at Newmont’s Tanami mine in the Northern Territory.

Downgrades to outstrip upgrades

I think investors will be willing to overlook this given the quantum of the profit upgrade. Codan is also a rare ASX stock given that most companies have been issuing profit downgrades during this “confessions season”, which typically runs through to July as boards review their FY19 financial performance and issue updates to investors under their continuous disclosure obligations.

We’ve already seen some high-profile casualties downgrading their FY19 expectations. This includes Virgin Australia Holdings Ltd (ASX: VAH), Reliance Worldwide Corporation Ltd (ASX: RWC), and Flight Centre Travel Group Ltd (ASX: FLT).

While the surprise federal election result that returned the investment-friendly Morrison government and potential interest rate cuts by the RBA has improved the outlook for our market, we are still likely to see more profit warnings (outside of the resources sector) over the coming weeks due to the global economic headwinds.

This also means Codan’s profit upgrade is more likely to be the exception – not the rule.

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Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Reliance Worldwide Limited. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited. The Motley Fool Australia has recommended Reliance Worldwide Limited. 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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