The market looks set to end the week on a negative note, but some ASX stocks are feeling more heat after being downgraded by leading brokers.
The S&P/ASX 200 Index (Index:^AXJO) shed 0.7% of its value to trade just under the psychologically important 6,000 mark.
However, the top 200 benchmark is still finish the week with a more than 1% gain, although the same can’t be said for the RESMED/IDR UNRESTR (ASX: RMD) share price.
ResMed’s double downgrad
Shares in the sleep disorder treatment company tumbled 3.1% to $25.08 in after lunch trade. This makes it the third worst performer on the ASX 200 after the JANUS/IDR UNRESTR (ASX: JHG) share price and V MONEY UK/IDR UNRESTR (ASX: VUK) share price.
ResMed is losing favour today as not one, but two brokers downgraded their recommendation on the stock following its profit results.
While ResMed’s earnings came in ahead of consensus, the good news is reflected in its share price, according to Morgan Stanley.
Earnings beat fails to excite
The company’s earnings beat is largely driven by better-than-expected cost control and demand for ventilators to treat severe COVID-19 cases.
These tailwinds are likely to fade with the broker pointing to an acceleration in cost growth as the economy picks up speed. Further, demand for ventilators will also taper off in FY21.
The fall-off in ventilator sales will need to be made up by rising demand for its core sleep apnea solutions.
Slower recovery for core business
“The main challenge now is to weigh up what looks likely to be a sharp tapering of ventilator demand (10-15% of Group) against a steady recovery in sleep apnea (85-90%) through the coming quarters, which is clearly subject to a wide degree of uncertainty,” said Goldman Sachs.
The fact is the pace of growth for its core products is unlikely to make up for falling ventilator sales.
Morgan Stanley cut its recommendation to “equal-weight” from “overweight” with a price target of $25.40 a share.
Goldman lowered its rating on ResMed to “neutral” from “buy” with a target price of $26.40 a share.
Hanging up on TPG
Another stock that’s underperforming today is the TPG Telecom Ltd (ASX: TPG) share price, which got downgraded by UBS to “sell” from “neutral”.
The broker believes that the special dividend of $0.49 a share and the Tuas Ltd (AS: TUA) spin-off haven’t been unwound from the current share price.
“On the day prior to the announcement of the special dividend, TPG was trading at $8.05, and rallied to $8.90 immediately prior to the completion of the merger,” said UBS.
“This compares with our previous $8.00 valuation. Our new valuation is $7.20, which removes the special dividend and Tuas.”
Too big a premium to Telstra
Further, UBS pointed out that TPG trades at a premium to the Telstra Corporation Ltd (ASX: TLS) share price.
While some premium may be justified due to synergies from TPG’s merger with Vodafone, UBS thinks it’s currently too excessive.
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Motley Fool contributor Brendon Lau owns shares of Telstra Limited and TPG Telecom Ltd. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended ResMed Inc. 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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