The S&P/ASX 200 Index (Index:^AXJO) big 33% surge in the past four months pushed a number of stocks beyond good value. Broker have just downgraded their recommendations on a number of these outperformers.
The latest clutch of downgrade candidates come from the resources sector after they released their latest quarterly production and profit updates.
Brokers have used this as a trigger to downgrade their recommendations on these stocks after their solid run.
Quality holding but little upside
The most notable is the Rio Tinto Limited (ASX: RIO) share price with Morgans dropping its rating on the stock “hold” from “add”.
Australia’s largest iron ore miner posted its half year result yesterday evening. While Rio Tinto’s earnings were ahead of the broker’s estimates, its interim dividend disappointed.
The miner’s first half underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of US$9.6 billion was ahead of the US$9.0 that Morgans was forecasting. But operational cash flow was weaker than expected.
“As a result RIO announced an interim ordinary dividend of US$1.55ps (53% payout ratio) with no special dividend, which fell short of our US$1.74ps estimate,” said the broker.
But Morgans still regards the stock as a worthy core holding for investors and its 12-month price target on Rio Tinto is $107 a share.
Meanwhile, JP Morgan downgraded its recommendation on the IGO Ltd (ASX: IGO) share price following the release of its quarterly production report.
The nickel miner’s joint-venture gold project, Tropicana, is the key reason why the broker cut its rating on IGO to “neutral” from “overweight”.
“We had been expecting a weaker production year but costs were significantly higher than us with ~$560/oz relating to stripping and $65/oz to [underground],” said the broker.
“The significant [year-on-year] increase costs/stripping has snuck up on us. We are not sure if it’s an investment in the future of the past.”
JP Morgan lowered its price target on the stock to $5.45 from $6.10 a share.
Lost its shine
The broker also lowered its call on the St Barbara Ltd (ASX: SBM) share price to “neutral” from “overweight”.
The gold miner’s Gwalia project is to blame with management forecasting production of 175,000 to 190,000 ounces in FY21 at a cost of $1,435 to $1,560 an ounce.
Further, St Barbara also gave a soft guidance for Gwalia for FY22 and FY23, which is significantly weaker than what JP Morgan was expecting.
The broker dropped its price target on the stock to $3.60 from $4.40 a share.
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Motley Fool contributor Brendon Lau owns shares of Rio Tinto Ltd. 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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