The latest ASX broker “buy” ideas that got a valuation upgrade

If you are worried about our market running out of puff near its 11-month high, there are some ASX stocks that have been just given more room to run.

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If you are worried about our market running out of puff near its 11-month high, there are some ASX stocks that have been just given more room to run.

The S&P/ASX 200 Index (Index:^AXJO) is struggling on the wrong side of breakeven this morning as some fret about over stretched valuations.

However, top brokers these three ASX stocks are still good value as their price targets just got upgraded.

Bumper valuation upgrade

The Incitec Pivot Ltd (ASX: IPL) share price is one example. Morgan Stanley lifted its fair value target on the fertilizer supplier by 14.5% to $3.15 a share.

Rising soft commodity prices are expected to provide further support to fertilizer prices. That prompted the broker to increase its FY21 earnings forecast on Incitec.

“We view soft commodity prices, specifically corn and soybeans, as key leading indicators for fertiliser demand,” said Morgan Stanley.

“Corn prices have increased markedly in recent weeks, a positive lead indicator for fertiliser prices.”

The broker is recommending the IPL share price as “overweight” (which is equivalent to a “buy”).

Lying on a bed of cash

Meanwhile, the Resmed CDI (ASX: RMD) share price also got a material valuation upgrade from UBS.

The broker increased its price target on Resmed’s US stock to US$241 from US$210 a share on expectations that the medical device developer will be flushed with cash.

Over the past three financial years, Resmed generated more than US$1.5 billion in cash from free cash flow (before acquisitions). The company used around US$1 billion to buy MatrixCare in 2018 and used the excess cash to pay dividends.

Expected buyback triggers upgrade

“However, assuming RMD does not make any further major acquisitions in the near term, by the end of FY21, we estimate net debt to reach only ~US$139mn,” said UBS.

“In order to reduce a significant cash balance by FY23+, we have incorporated a ~10% share buyback, commencing in 1Q FY22E.”

The effect of the buyback will be seen in a higher earnings per share (EPS) for Resmed. UBS has a “buy” rating on the RMD share price.

Price target revving up for ASG share price

Finally, the Autosports Group Ltd (ASX: ASG) share price is shifting up a gear. The analysts at Macquarie Group Ltd (ASX: MQG) upped their profit forecasts for the car dealer due to stronger expected margins.

The COVID-19 pandemic isn’t all bad news for automotive sales. While auto sales did take a temporary hit, the supply chain disruption and surge in demand from commuters afraid of taking public transport led to widespread shortages of vehicles.

Good luck trying to get a discount on your next car in this environment!

Attractively priced ASX small cap

“Conditions remain favourable and look set to continue for much of the remainder of FY21,” said Macquarie.

“While margins will start to normalise throughout CY21 leading to lower earnings in FY22 vs FY21, the FY22e P/E of 9x provides significant valuation support.”

The broker increased its 12-month price target on the ASG share price to $1.90 from $1.75 a share and has an “outperform” recommendation on the stock.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia has recommended ResMed Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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