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Why brokers have just downgraded BHP and these ASX stocks today

The BHP Group Ltd (ASX: BHP) share price is rallying even after a broker downgrade, although the same can’t be said for two other ASX stocks that got the chop.

Shares in the Big Australian jumped 1.8% during lunch time trade to $36.29 when the S&P/ASX 200 Index (Index:^AXJO) climbed 0.7%.

Its outperformance comes despite Credit Suisse’s move to lower its recommendation on the UK and ASX-listed miner to “neutral” from “outperform”.

Well positioned but fully priced

It’s the strength of its balance sheet and the relatively positive outlook for iron ore that is probably keeping investors onside. Such qualities are hard to find in an increasingly uncertain world due to the COVID-19 outbreak.

But Credit Suisse doesn’t believe these positive attributes are enough to keep the stock as a “buy” after the recent rally in the BHP share price.

“We still regard BHP’s balance sheet as being robust and see little risk to dividends with FY20E yields at 5%,” said the broker.

“However, we think yields are no longer attractive enough to serve as a trigger to push the stock price higher.”

Credit Suisse’s price target on BHP is $37 a share.

Unconstructive headwinds

But the Lendlease Group (ASX: LLC) share price wasn’t quite as lucky. Shares in the engineering and construction group tumbled 2.8% to $12.31 at the time of writing after JP Morgan cut its recommendation to “neutral” from “overweight” today.

The broker pared its enthusiasm for the stock as it believes its construction division is likely to face earnings headwinds.

“Lendlease last week recognized a A$260m EBITDA loss (JPMe) in 2H20 for construction,” said JP Morgan.

“We revise down our forecast construction earnings, assuming lower-than-normal productivity for the next six months, a decline in backlog revenue for the next two years, as market-wide construction in resi and commercial is assumed to decline (typically 50% of book), and some moderation in segment margins.”

The broker’s 12-month price target on the stock is $13.50 a share.

Makings of a poor trade

Another stock to fall on a downgrade is the ASX Ltd (ASX: ASX) share price, which fell 0.9% to $86.59.

UBS cut its rating on the stock to “sell” from “neutral” after shares in our share market operator outperformed and has recovered all its losses from the COVID-19 bear market.

The stock was lifted by an increase in share trading activity from retail investors and a large number of capital raisings.

“Despite this, ASX’s key Derivatives segment has been an area of weakness with volumes -12% on pcp in 2H (June -28%) with our Futures volume regression analysis pointing to further growth headwinds into FY21E (UBSe +0% in FY21E),” said UBS.

“Given delays to its CHESS replacement (now slated April-22), project spend may remain elevated near term.

“While ASX offers a defensive 2.6% dividend yield, its 33.7x 12mth forward PE (UBSe) is at odds with its more moderate medium-term growth outlook.”

The broker’s price target on the stock is $75 a share.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited. 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 Scott Phillips.

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