Shares in wholesale distribution and marketing company Metcash Limited (ASX: MTS) continued to fall Tuesday following the company's announcement that it lost a major South Australian customer and trading update. 

As at mid-afternoon Tuesday, Metcash shares were trading down 1.7%, compared to a 0.9% gain in Wesfarmers Ltd (ASX: WES) and a 0.3% drop in Woolworths Group Ltd (ASX: WOW). Tuesday's fall takes Metcash's losses over the past two trading days to almost 19%. 

On Monday, the company announced that its South Australian customer, Drakes Supermarkets, would not use Metcash's distribution centre beyond the end of an agreement between the two companies in June 2019.

Metcash also announced that expects to report a 1.2 per cent sales decline at its supermarkets and convenience business for the full year ending 30 April 2018, and a 3.6 per cent sales decline at its wholesale business, excluding tobacco. 

Despite the bad news, there are some compelling reasons why the stock is worth a look right now, namely its low earnings multiple, earnings diversification from its hardware and liquor businesses and the impact of the loss of Drake's being contained. 

Ord Minnett agrees, noting that easing food deflation is also a positive, as well as a moderation in growth from competitor Aldi, and the Coles demerger creating an environment whereby food deflation could further reduce. 

At the same time, it says the independent retailer environment appears to be in better shape, whilst cost savings present potential upside. 

"We see valuation upside potential, noting Metcash's low earnings multiple despite strong growth, as previous multiple ranges do not reflect the changed business mix," it said in a report.  

The broker has an "Accumulate" rating on Metcash and a price target of $3.60. 

Ord Minnett also adds that it is confident that Metcash will retain its customers in South Australia, despite the Drake's update. 

Morgan Stanley also sees the Drake situation as an isolated incident. 

"We think the prospect of incremental independent supermarkets establishing their own distribution is low given 1) high fixed costs and 2) low existing profit margins. We wouldn't rule out the possibility of Drakes eventually moving back to MTS distribution in future after negotiating terms," the broker said in a report. 

Morgan Stanley also believes the share price slump is overdone, given the earnings impact and Metcash's increasing earnings diversification through recent acquisitions in the hardware and liquor sectors. 

Morgan Stanley has an "Overweight" rating on Metcash. It lowered its FY18/19 earnings estimates by -1% on the back of guidance for flat FY18 earnings in the Food business and lowered its FY20 earnings estimates fall by 5% due to the impact of lost Drake supermarket sales

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Shares in listed conglomerate Wesfarmers Ltd (ASX: WES) pared back gains Monday after news that it was selling its long suffering UK home improvement business saw the shares climb to an 18 month high last Friday. 

The stock has been a solid performer over the past few weeks but is still looking relatively compelling to peers on a relative basis despite its share price strength.  

On a one-year basis, the stock has gained 5.9% compared to an 11.1% gain for Woolworths Group Ltd (ASX: WOW) and a whopping 50.5% gain for Metcash Limited (ASX: WOW).

On a price-to-earnings (P/E) basis, the stock is also not looking too pricey, trading on a P/E of 16.1 times, compared to 22.5 times and 18.9 times for Metcash and Woolworths, respectively, according to Reuters estimates. 

But is this enough to say that the stock is worth another look right now? 

For many brokers, the answer is no, with most cautious on the stock despite welcoming the sale of the UK home improvement business, Homebase, as a good move. 

Broker UBS kept its "Neutral" rating on the stock, saying it believes Wesfarmers is fair value at current levels. 

"We believe WES has a strong suite of businesses, with market-leading positions; however, the short/medium-term earnings outlook remains relatively muted," the broker said in a report.  

"That said, at c18x FY19e EPS, and a c5% FY19e dividend yield, we retain our Neutral seeing few immediate catalysts for underperformance. Key positive catalysts on a 6-12mth view are likely: i) Positive margin surprise at Coles if real LFL trends improve; and, ii) Capital return funded via Curragh proceeds, which we view as likely at the FY18 result." 

Shaw and Partners also kept its "Hold" rating on Wesfarmers, mainly due to valuation concerns following the stock's strong run.   

"The stock has run strongly recently, and with our TSR at 1.2% it is getting toppy as the valuation also gets stretched," it said in a report. 

Ord Minnett was also cautious, retaining its "Hold" rating, saying the outlook for Wesfarmers is somewhat mixed and it sees a lack of valuation support.  

"The new CEO and CFO are driving bold change, addressing challenged divisions and share price underperformance. Bunnings is expected to continue to perform very well following industry consolidation and its strong position in ANZ, with the BUKI exit judicious. Coles, under new leadership, could leverage the undemanding comparable numbers and margins to drive performance, although Woolworths (WOW, Accumulate) has momentum with the demerger business cum capex," it said.

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Oil and gas giant Woodside Petroleum Limited (ASX: WPL) has emerged as a key defensive stock for many investors in recent weeks, thanks to its strong dividend yield and balance sheet.

Woodside's dividend yield of 3.6%, doesn't look too bad against the dividend heavyweights, Australia and New Zealand Banking Group (ASX: ANZ) on 5.8%, Commonwealth Bank of Australia (ASX: CBA) on 6.2%, National Australia Bank Ltd. (ASX: NAB) on 7.4%, Westpac Banking Corp (ASX: WBC) on 6.6% and Telstra Corporation Ltd (ASX:TLS) on 8.3%.

But is a solid yield and balance sheet strength enough to say the shares are a buy?

Market experts have differing views on the topic following the company's investor day on Wednesday.

While broker Credit Suisse acknowledges that Woodside is the most defensive name in the oil and gas sector thanks to its strong balance sheet and around a 4-5% dividend yield from CY2018-2020E, that's not enough for the broker to be positive about the stock.

It has a "Sell" recommendation on Woodside and says it continues to see a risk to consensus earnings on repricing for the company's Pluto offshore LNG production facility and generally lower liquefied natural gas (LNG) pricing longer term.

Another reason for the cautious stance is the belief Woodside is focusing too much on the schedule for its Scarborough gas assets – which Woodside acquired a stake in from Exxon Mobil Corporation (NYSE: XOM) earlier this year.

"We are cautious that WPL is focusing too much on schedule for Scarborough. The risk is a suboptimal design or poor project execution. WPL's LNG market outlook isn't too dissimilar from our own and we agree project sanctions need to occur in earnest to satisfy future demand," the broker said in a report.

At the investor day, Woodside announced a significant expansion of its Pluto processing facility and brought forward estimations of first gas production at the Scarborough site and increased expected expenditure. The company now estimates spending $US11 billion on the Scarborough development, up from a previous estimate of between $US8.5 billion and $US9.7 billion.

UBS, on the other hand, welcomed the Scarborough update, kept its "Buy" rating on the stock and upped its target price to $37.50 from $34.70.

"In our view the market is underestimating WPL's willingness and capacity to execute on Scarborough (which is set to soundly beat PNG LNG expansion to market, in our view) and is overly pessimistic on Pluto LNG contract repricing," it said in a report.

It added that Woodside's desire to bring forward Scarborough gas production should not only lock in development contracts at the low point of the cycle but also capture the expected global LNG supply shortfall emerging from 2022.

Macquarie, meanwhile, said while the message about fast-tracking of increased volumes at Scarborough was positive, the investor day offered few surprises.

It retained its "Neutral" recommendation on the stock.

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Investors in Telstra Corporation Ltd (ASX: TLS) have been grappling with some pretty bad news of late and one factor clouding the outlook for suffering shareholders is how much the beleaguered telco will have to cut its dividend.

Brokers have been grappling with the question of late – with most saying the telco's commitment to a 22 cents per share payout is at risk, but there are differing views on just how much Telstra would have to chop.

UBS is the latest broker to weigh into the debate, saying the answer hinges on whether Telstra can limit its credit ratings downside and whether the telco announces any initiatives at its upcoming June strategy day.

"On the former, we no longer think TLS can support its 'A' credit rating, with a potential downgrade to 'A-' (and even 'BBB+' long term) increasingly likely," it said in a report.

"Nevertheless assuming TLS acts to limit credit rating downside, progressive dividend cuts from FY20 are potentially required."

It added that Telstra is likely to cut its dividend in order to soften any credit ratings downgrades, noting that historically, a 1.5 – 2.0x debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio was sufficient for the telco based on its "strong" business profile.

However, it says with factors such as competitors narrowing the mobile network gap (plus a 4th entrant), a stronger financial profile is arguably required relative to history but Telstra is on track to see its adjusted debt to EBITDA rise to ~2.2x in FY20 / FY21 on a 22cps dividend.

"Cutting DPS is one solution: but a progressive cut to ~14cps is necessary for leverage to fall below 2.0x by FY22E," it said in a report.

UBS is forecasting Telstra's FY2018-2019 dividend to remain at 22 cents per share, a cut to 18 cents per share in FY2020 and a cut to 14 cents per share in FY2021-2022, with its forecasts subject to any initiatives the company announces at the upcoming strategy day.

The broker adds that it believes that Telstra will outline strategies at the June investor day, such as productivity and cost-out initiatives which could protect a 22 cents per share dividend in FY2019 and soften a dividend cut in FY2020.

The broker also cut its target price to $2.80 from $3.10 and has a "Neutral" rating on Telstra.

Telstra is currently on a dividend yield of 8.4% compared to 5.8% for Australia and New Zealand Banking Group (ASX: ANZ), 6.1% for Commonwealth Bank of Australia (ASX: CBA), 7.3% for National Australia Bank Ltd. (ASX: NAB) and 6.6% for Westpac Banking Corp (ASX: WBC).

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With all the bad news facing AMP Limited (ASX: AMP), it would seem to be a no brainer to steer clear of the wealth management group right now.

After all there's been the fallout from the Royal Commission, board and executive changes, two class action lawsuits and the threat of more profit downgrades from the company.

All these negative factors pushed AMP to a fresh-year low of $3.73 a day after the group's annual general meeting on May 10.

But some market watchers are saying now is good time to take a fresh look at the stock, saying concerns have been overplayed.

Broker Morgan Stanley is of this view. It says AMP offers deep value, with the stock trading at levels not seen since 2002/2003. The broker also says that market fears of a mass client and planner exodus alongside a dramatic fee squeeze seem overdone.

"In our view, investors cannot ignore the opportunity presented and now is the time to build a position. We have for a long time believed that the inherent value in AMP is not recognised by the market and we have highlighted tail risks of AMP becoming a value trap. These tail risks reflected potential adverse outcomes arising from the lack of Board cohesion, potential Chair and CEO fallout, challenges to executing on unlocking value in the existing structure and potential regulatory risks undermining its reputation in financial advice," it said in a report.

"Fair to say, in quick succession all these risks have come home to roost. In the >15 years we have been analysing AMP, this is unprecedented."

Morgan Stanley adds that the circa 30% fall in AMP's share price since the resignation of Chief Executive Officer (CEO), Craig Meller, on March 26 implies around a 75% in wealth earnings, but notes that its wealth divisions remain largely unaffected.

According to Reuters estimates, AMP is also looking pretty cheap at current levels. It is trading on a P/E of 13.5 times, compared to Perpetual Limited (ASX: PPT) on 13.7 times and Magellan Financial Group Ltd (ASX: MFG) on 25.4 times. The sector P/E is 19.6 times.

Morgan Stanley concedes, however that AMP Limited is not without risks, with a client exodus, regulatory intervention on grandfathered products and a prolonged CEO transition some of the factors that could present negative surprises.

The broker cut its target price to $4.50 from $5.75 due to earnings downgrades to its base case scenario, a re-working of its bull and bear cases and an increase in cost of equity to 11.5% (from 10.5%) to reflect heightened business risks.

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It's been a tough time of late for shareholders in Telstra Corporation Ltd (ASX:TLS) with the share price sinking to fresh lows and the company announcing on Monday that its full-year earnings would be at the lower end of previous guidance. 

The stock is still on a pretty good dividend yield of 7.6%, ahead of the major banks with National Australia Bank Ltd. (ASX: NAB) on 7.1%, Westpac Banking Corp (ASX:WBC) on 6.2%, Commonwealth Bank of Australia (CBA) on 6% and Australia and New Zealand Banking Group (ASX: ANZ) on 5.8%. 

But anyone holding the stock for income may want to reconsider Telstra as a long-term dividend play. 

Telstra's downgrade to its earnings guidance highlights the acceleration of the company's earnings decline and possibly risks a cut to the dividend, despite Telstra remaining committed to a 22 cent total dividend payment for now.

On Monday, the company said full-year EBITDA is now expected to come in at the bottom end of a previously stated $10.1 billion  to $10.6 billion range. 

Citigroup is one broker saying that the telco needs to "take quick drastic action in order to slow the earnings decline and minimize the next dividend cut." 

"The acceleration in the core business decline means that we no longer believe Telstra can generate sufficient earnings to maintain a 22c dividend in both FY19 & FY20 without breaching the upper limits of the payout ratios in its capital management framework," the broker said in a report. 

"In our view it no longer makes sense to pay 22c beyond FY18 when the ordinary dividend is likely to fall to 11c once the one-off payments end." 

Citigroup also said that it saw limited scope for revenue growth in Telstra's core businesses and the company should instead consider more aggressive cost cutting and could consider more drastic actions including asset sales, tower sharing agreements and even providing competitors with access to core infrastructure in order to boost wholesale revenues. 

The broker cut its core EPS forecasts by 5%-15%, reported EPS were cut by 5%-6%, and target price to $2.70 from $3.10. It has a "Sell" rating on Telstra. 

Macquarie is another broker that also doesn't have confidence in the telco's 22 cent dividend level.  

It said the earnings downgrade highlighted the competitive pressures and boded poorly for Telstra's FY2019 outlook, with the broker cutting its forecast FY2019 dividend to 20 cents per share. 

"While Telstra could use NBN one-off payments to sustain the current 22cps level for the next few years under its current policy, we think the increasing pressures on the business introduce scope for a more conservative view being taken on the long-term dividend outlook," the broker said in a report. 

Macquarie also downgraded near-term EPS estimates by 7% to 10% due to ongoing competitive pressures, deteriorating operating trends and an acceleration in NBN activations pressuring earnings. 

It also cut its target price by 9.9% to $3.20. It has a "Neutral" rating on Telstra. 

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Shares in grains storage and transport company Graincorp Ltd (ASX: GNC) bounced higher on Monday despite brokers having mixed views on the stock after the company's first-half result.

Credit Suisse is one broker that is positive. It upgraded the stock to "Outperform" from "Neutral" due to recent share price weakness going into the first-half result and Graincorp having a number of initiatives likely to deliver better profit and capital utilisation over the medium term.

The favourable view comes after Graincorp reported a large contraction in first-half earnings on Friday as ongoing dry weather conditions plagued crop production.

The company posted a 64% decline in underlying net profit after tax to $36 million and almost a 50% fall in underlying earnings before interest, tax, depreciation and amortisation to $119 million. Graincorp also cut its interim dividend from 15 cents to 8 cents per share.

The result came on the back of peer Incitec Pivot Ltd (ASX: IPL) posting a 1H2018 result that was below consensus forecasts, and fellow agricultural group, Nufarm Limited (ASX:NUF), downgrading earnings forecasts due to ongoing challenging weather conditions across Australia, Europe and the United States.

Credit Suisse says that whilst near-term catalysts for Graincorp are largely weather related, "medium-term prospects for a significantly more diversified grain marketing business, asset sale opportunities, an improving earnings picture in refined oils and further opportunities in craft malt and whisky remain supportive of valuation."

The broker cut its target price to $8.80 from A$9.06 largely due to debt adjustments.

Other brokers are more cautious, however, with mixed views on the outlook for Graincorp in FY2019.

Macquarie says while Graincorp is continuing to push ahead with efficiency and diversification efforts and these are starting to see results, it believes the rest of these results are only likely to flow through in FY2019. The broker kept its "Neutral" rating on the stock.

Morgans, however, believes there is potential for another challenging year for Graincorp in FY2019.

"Given the challenging start to the next winter crop and the potential for it to be another below-average year, we are cautious on GNC in the short term," it said in a report.

It also says while there is potential upside risk from the company realising value from the sales of its infrastructure assets, it questions whether the company would divest its liquid terminal assets in the near term given they generate stable earnings.

Morgans has a "Neutral" rating on Graincorp.

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Shares in property website business REA Group Limited (ASX: REA) surged to an all-time high Monday, but market watchers remain mixed as to whether the stock is still good value at current levels. 

As of mid-afternoon Monday, REA Group shares were up $1.40 at $90.11 after hitting an all-time high of $90.85 earlier in the session as investors welcomed the group's strong third quarter 2018 result announced on Friday. 

REA Group has also outpaced peers over the past six months, gaining 17.7% compared to a 10.4% advance in SEEK Limited (ASX: SEK), a 6% lift in Carsales.Com Ltd (ASX: CAR) and a 7.9% decline in Domain Holdings Australia Ltd (ASK: DHG). 

UBS is one broker saying the stock looks expensive at current levels and maintained its "Sell" rating, despite having a positive view on REA Group's underlying business from a qualitative point of view. 

It argues that the market is simplistically valuing REA on the same P/E multiple that the stock has historically traded on (i.e. 30x P/E or above).  

"At the current prices, the market is pricing REA at a P/E premium to even that historic multiple – perhaps factoring an FY19 earnings upgrade," it said in a report. 

It said with a larger revenue base to grow future earnings on and an increasing revenue contribution towards Asia and REA Group's finance business, there were risks to viewing the stock through that historic valuation lens.  

"Hence we maintain our Sell rating on valuation grounds alone," the broker said in a report. 

Credit Suisse and Morgan Stanley disagree, saying the high P/E multiple is justified given the earnings outlook. 

Credit Suisse, which has a "Neutral" rating on the stock, notes REA Group is trading at 33x FY19F P/E, which it believes "fairly reflects its strong growth profile". 

The broker also lifted its target price on the stock to $85.00 from $75.00 due to factors such as the integration of residential property data company, Hometrack Australia Pty Ltd, following the announcement of the acquisition earlier this month, and more favourable long-term assumptions for adjacent businesses. 

Morgan Stanley, meanwhile, is more bullish with an "Overweight" rating on REA Group. 

The broker has a target P/E multiple of 28x on the stock which it notes is a meaningful premium to the broader Australian market average P/E of 14x, but says this is warranted by its forecast three-year high double digit EPS CAGR for FY2017-2020E. 

Morgan Stanley says that REA Group's quarterly results were slightly stronger than expected which was important for confirming its revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) growth trajectory. 

On Friday, REA Group posted a 20% increase in revenues in 3Q2018 to $592 million and a 21% increase in EBITDA to $345 million. 

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Shares in listed cloud accounting business, Xero Limited (ASX: XRO), have had a stellar run of late, but it may be a stock still worth looking at due to the group's strong subscriber growth and accelerating earnings profile.

Xero shares have skyrocketed around 85% over the past 12 months, easily outpacing the around 4% gain in the benchmark S&P/ASX 200 Index and peers Myob Group Ltd (ASX: MYO) and Reckon Limited (ASX: RKN), which have declined 14% and 28%, respectively.

Macquarie is one broker that is backing the stock, upgrading Xero to "Neutral" from "Underperform" following the company's FY2018 results on Thursday.

The broker says that Xero continues to demonstrate strong subscriber growth with the base having almost doubled in the last two years, largely driven by additions in Australia and UK.

"With growth continuing to accelerate, strong execution and discipline have seen margins improve with scale efficiencies in the cost base beginning to be seen, particularly in ANZ," the broker said in a report.

In its FY2018 result, Xero reported a 351,000 increase in subscribers to 1.4 million for the year to March 31, 2018 and a 28% lift in revenues. The group also posted its first positive earnings before interest, tax depreciation and amortisation (EBITDA) of $26.0 million, compared to a $28.6 million loss in FY2017.

Macquarie says that Xero's earnings are beginning to highlight the significant operating leverage opportunity within the business, while subscriber growth is translating into strong top-line growth.

At the same time, the broker notes the FY2018 result highlighted the scalability of Xero's cost base, with an 11% contribution margin improvement to 57% in the company's Australia and New Zealand business.

Another highlight was the fact that Xero is experiencing only modest average revenue per user (ARPU) decline, highlighting "the strong demand of Xero's offering versus peers as well as focus on the higher margin customer, with an increasing product suite," Macquarie said.

Macquarie is forecasting a net profit after tax lift of around $8 million in both FY2019 and FY2020.

UBS also notes Xero's subscriber growth as a highlight and rates the stock "Neutral".

Its reaction to the FY2018 result was more conservative, given it was in line with the broker's forecasts.

UBS, however, sees potential for Xero's subscriber growth to continue to accelerate, particularly in the UK market. It is forecasting subscriber growth to increase to over 149,000 in FY2019, compared to more than 100,000 in FY2018.

The broker's upside scenario which gives the stock a fair value of $74.50, also could imply a $100+ valuation within five years if rolled forward, it says.

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Shares in Commonwealth Bank of Australia (ASX: CBA) traded lower again Thursday, but an uncertain earnings outlook and premium relative valuation suggest it may be too early to buy back into the stock right now.

Coupled with a poor third-quarter result and analysts downgrading earnings forecasts for the bank, there appears to be better value elsewhere in the banking sector right now.

One reason for the cautious view is Commonwealth Bank's P/E premium to peers, with many market watchers saying this is unwarranted given ongoing regulatory concerns and a modest earnings per share outlook.

According to Reuters estimates, Commonwealth is trading on a P/E of 13.4 times, compared to just 11.7 times for Australia and New Zealand Banking Group (ASX: ANZ), 12.6 times for Westpac Banking Corp (ASX: WBC) and 13.3 times for National Australia Bank Ltd. (ASX: NAB).

Macquarie is one broker that argues the P/E premium is difficult to justify. It maintained its "Hold" recommendation on the stock and said Commonwealth Bank faces "ongoing challenging trends and uncertainty around the level at which earnings are likely to settle".

The broker also says the bank is likely to step up provisions in the fourth quarter as it provides for the expenses that will arise from APRA's enforceable undertaking which was issued at the beginning of May.

Morgan Stanley is even more cautious, retaining an "Underweight" rating on Commonwealth Bank. It says that its previous prediction of an ongoing derating of the stock is now playing out, due to a moderation in the bank's growth and return profiles.

The broker is forecasting no EPS growth between FY15 and FY19E and the bank's return on equity falling from around 18% to around 14.5% over the same period. It is also predicting slower home loan growth, downside risk to margins, ongoing conduct concerns, an earnings hole from asset sales, and some strategic uncertainty.

One of the key factors is the ongoing uncertainty over costs due to the bank's compliance and regulatory burden, with the broker saying while it is forecasting business as usual cost growth of around 2% this year, provisions for regulatory and compliance costs are likely to lift total expenses by around 5.5% year-on -year.

UBS agrees on this, saying regulatory risks remain very high and says it does not believe the costs relating to APRA's enforceable undertaking will be one-off in nature.

"Further, we believe it may be challenging for CBA to undertake a material cost-out strategy to offset revenue pressure while going through these EU processes," it said in a report.

The broker maintained its "Hold" recommendation given the challenging outlook for the bank and risks being skewed to the downside.

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Shares in industrial chemicals, fertilisers and explosives group Incitec Pivot Ltd (ASX: IPL) fell for the second straight day on Thursday after the company posted a 1H2018 result that was below consensus forecasts.

But is the stock worth another look right now?

That's a question that has most market watchers voicing somewhat mixed views, given differing assessments on the stock's risk reward balance at current levels.

And whilst Incitec Pivot may be trading on a lower trailing twelve month P/E to peers, some argue that the stock is looking expensive right now.

According to Reuters estimates, Incitec Pivot is trading on a P/E of 19.9 times, compared to Orica Ltd (ASX: ORI) on 471.9 times and Nufarm Limited (ASX: NUF) on 30.1 times.

Credit Suisse is one broker saying the stock looks pricey and downgraded Incitec Pivot to "Underperform" from "Neutral" on Thursday.

It argues that the company's valuation is looking stretched due to factors such as uncertainty around capital expenditure and costs and headwinds for the Australian explosives business.

"With a more significant rebasing of FY18 than expected, headwinds in Australian explosives increasingly apparent, some uncertainty around capital expenditure and costs from an extended maintenance cycle and a surprisingly small reaction to an underwhelming 1H18 result seeing IPL look increasingly expensive at 18x FY18 EPS, we downgrade our target price to A$3.39/share and rating to UNDERPERFORM," the broker said in a report.

Morgans agrees on the subject of valuation. According to its estimates, Incitec Pivot is trading on a FY2019F P/E of 16.5 times, above its long-term average P/E of 13-14 times.

The broker maintained its "Hold" recommendation, noting a balance between the reward of a share buyback resuming, a falling Australian dollar and DAP price against the risk of weak ammonia and urea prices.

Morgan Stanley is also neutral on the company, retaining an "Equal-weight" rating and says while recent share price weakness has opened a gap in its valuation, "the stock is likely to be confined to its recent trading range" pending a broader discussion on the company's strategy.

"Management provided some colour on recent organisational changes, but we believe the market is looking for a broader discussion re: the group's longer-term strategic setting," it said in a report.

Ord Minnett however, remains bullish on the outlook for Incitec Pivot and says the company "is entering a period of strong operational performance and earnings growth".

The broker says earnings from Incitec Pivot's US ammonia plant, WALA and improved explosives demand are expected to drive growth, although volatile fertiliser pricing and currency remain headwinds.

It added that productivity benefits from the company's Business Excellence program "have supported divisional margins in recent periods and, along with the announced share buyback, are expected to generate EPS growth, although Gibson Island remains a distraction."

The broker also says valuation support exists and maintains its "Buy" recommendation.

The post Brokers mixed on Incitec Pivot after 1H2018 result appeared first on The Motley Fool Australia.

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Adverse weather conditions may have negatively affected the near-term earnings outlook for listed agricultural group, Nufarm Limited (ASX: NUF), but there are strong signs the stock may be worth looking at as a longer-term play.

On Tuesday, the company downgraded its earnings forecasts due to ongoing challenging weather conditions across Australia, Europe and the United States.

Nufarm said it expected underlying earnings before interest and tax for the twelve months to 31 July 2018 to be approximately 5% above FY2017's underlying EBIT of $302.3 million. This compared to the company's previous guidance of 5% to 10% growth.

However, Nufarm appears to have a solid long-term growth outlook, with its European acquisitions and its omega-3 project promising substantial upside from current levels.

The omega-3 project is being developed through the group's subsidiary, Nuseed Pty Ltd, and should produce the world's first plant-based source of long chain omega-3 fatty acids. This will help relieve pressure on wild fish stocks, with Nufarm claiming that one hectare of its omega-3 canola has the potential to provide the omega-3 yield from 10,000 kilograms of wild caught fish.

Morgan Stanley is one broker that sees the initiative as providing material upside for the group. The broker says there is 32% potential upside to its current price target of $11.75 and remains "Overweight" on the stock.

"In our view, NUF remains undervalued at current levels, given the improvement in the base business and robust earnings growth outlook. Beyond the base business, we think the Omega3 project presents substantial incremental upside that is yet to be captured in the share price," it said in a report.

Morgans, meanwhile, points to Nufarm's acquisitions in Europe as providing a robust earnings outlook for the group in FY2019 and FY2020.

"Its acquisition of two high-margin European product portfolios will strengthen its growth profile and earnings quality and we believe, should gradually narrow its valuation discount to peers," the broker said in a report.

Nufarm announced in October 2017 that it would acquire a portfolio of crop protection products from Adama Agricultural Solutions Ltd and Syngenta Crop Protection AG and related group companies for US$490 million. The product portfolio includes over 50 crop protection formulations which are registered for use in European markets and is expected to generate revenues of approximately A$250 million; an EBITDA contribution of approximately A$95-100 million; and be mid- to high-single digit earnings per share accretive (pre-amortisation) in the first full year of ownership (FY2019), the company says.

Credit Suisse and Morgans are also positive due to Nufarm's relatively cheap valuation at current levels. Credit Suisse has Nufarm on an FY2019 P/E of 15 times, whilst Morgans has the stock trading on an FY2019 P/E of just 13.5 times.

Morgans said that Nufarm's valuation was undemanding, particularly compared to domestic chemical peers, with Orica Ltd (ASX: ORI) on 21.9 times, Incitec Pivot Ltd (ASX: IPL) on 16.6 times and DuluxGroup Limited (ASX: DLX) on 20.1 times, according to its estimates.

Most brokers also note some near-term positives for the group at its upcoming investor day on May 10.

The post Top brokers say Nufarm Limited is a buy appeared first on The Motley Fool Australia.

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Shares in wealth management group Platinum Asset Management Limited (ASX: PTM) jumped almost 8% on Tuesday as investors welcomed the group's return to a net inflow position in April. 

After market close on Monday, Platinum reported that funds under management (FUM) increased to $28 billion in April, a 2.6% increase from the March level of $27.3 billion, and the group's highest FUM level since October 2015. 

Many investors viewed this as an extremely positive sign given concerns that the departure of Kerr Neilson from the Chief Executive Officer position would have a negative impact on fund inflows.   

In February, Mr Neilson, the founder of the international equities manager, announced he was stepping down from the CEO role to become an executive director of the group.  

The minimal impact on flows following that announcement is one reason why Platinum may be worth a look right now. 

Ord Minnett is one broker taking this view and upgraded the stock two notches to "Buy" from "Sell" on Tuesday.  

It said reasons for the positive view were Platinum's solid recent performance, flows looking steady and as the stock had "significant valuation support on offer." 

Following a mark to market, Ord Minnett noted that its price target of $6.50 per share offered 16% upside in addition to a fully franked FY19 yield of 5.5%.  

"With >20% total shareholder return on offer, net inflows sustained and the stock trading at the bottom end of its PE range, we upgrade to Buy," the broker said in a research note. 

The valuation also saw Credit Suisse take a more positive stance on the stock, with the broker upgrading Platinum to "Neutral" from "Underperform." 

Credit Suisse also agreed that Platinum's net flows are positive and its fund performance remains strong.  

"We also have growing confidence that the impact of the portfolio manager changes will be contained. For example, flows were positive in April and the outflows we saw last month were one-off in nature and related to the Asia Fund and not Kerr Neilson's. Further, two months on from the announcement of PM changes there has been no negative reaction from the rating houses with most having reaffirmed their ratings," it said in a report. 

Unlike Ord Minnett, however, Credit Suisse is more cautious on Platinum's valuation level – one reason it remains neutral on stock. 

It noted that while the stock has de-rated significantly, it remained the most expensive ASX-listed manager in its coverage universe. 

The broker also said that the recent fall in valuation "better reflects the risk to flows which remains skewed to the downside." 

According to Reuters' estimates, Platinum is trading on a P/E of 17.7 times, compared to 13.8 times for Perpetual Limited (ASX: PPT), 14.3 times for AMP Limited (ASX: AMP), and 25.6 times for Magellan Financial Group Ltd (ASX: MFG). 

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Following a somewhat messy but ahead of consensus forecasts first-half result, there are solid signs that Australia and New Zealand Banking Group (ASX: ANZ) should be a preferred pick among the major banking stocks. 

On first blush, the reasons why ANZ is a good pick may not be obvious. Despite underperforming the S&P/ASX 200 Index and most banking peers in the year to date, ANZ is not looking that cheap on a relative P/E basis.

According to Reuters, ANZ is trading on a P/E of 12.7 times, compared to National Australia Bank Ltd. (ASX: NAB) on 13.2 times, Commonwealth Bank of Australia (ASX: CBA) on 13.1 times and Westpac Banking Corp (ASX: WBC) on 12.5 times. 

Secondly, whilst ANZ offers a solid yield, it is in line with the other major banks. It offers a yield of 5.9%, compared to CBA's 6.0%, Westpac's 6.6% and NAB on 6.8%, according to Reuters' estimates. 

Thirdly, it was tricky to ascertain the underlying trends in the bank's first-half numbers, given the number of one-off items related to divestments as ANZ continues with its restructuring efforts. 

On Tuesday, the bank reported a 14% rise in first-half net profit to $3.3 billion and a 4% lift in cash profit of $3.5 million. The interim dividend was 80 cents per share fully franked, representing a payout ratio of 66% of cash profit on a continuing basis.   

However, investors should focus on potential earnings per share growth and valuation going forward, despite ongoing turmoil in the banking sector.

It is expected that the bank should deliver higher dividends and more buybacks as it continues with its restructuring efforts, supporting earnings growth. 

Macquarie Group Ltd (ASX: MQG) is one broker that supports this view. The broker maintained its "Outperform" rating on ANZ post the first-half result and says it sees longer-term value as ANZ simplifies its business and manages its expenses better than peers. 

"Ultimately, ANZ should have a simpler and higher-returning business," it said in a report.  

"In our view, ANZ remains well placed to deliver better EPS growth than peers in FY17-20, underpinned by ~$6bn of buybacks (as a result of surplus capital and a lower payout ratio than peers)." 

Citigroup also agrees saying the potential for higher dividends and/or buybacks should provide valuation support for the bank. 

"ANZ's buyback program has only just begun, and we expect a combination of dividend increases (subject to franking) and buybacks to continue to grow from FY19 onwards," it said in a report. 

Citigroup also maintained its "Buy" rating on the bank following the first half result 

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Shares in Australian grain storage and logistics group Graincorp Ltd (ASX: GNC) have rallied around 15.4% from its February year lows, so is the stock still good value at current levels? 

Certainly Graincorp shares have outperformed other ASX-listed peers over that period, but on a P/E basis, the stock still doesn't look overly pricey right now.  

According to Reuters estimates, Graincorp is trading on a P/E of 16.4 times, compared to 31.5 times for Nufarm Limited (ASX: NUF), 20.4 times for Incitec Pivot Ltd (ASX: IPL), 13.3 times for Ruralco Holdings Ltd (ASX: RHL) and 8.4 times for Elders Ltd (ASX: ELD). The P/E is also well below the sector level of 38.4 times. 

But it is concerns about crop risks and the 2018 crop season for the group that has market watchers cautious at current levels. They point to low soil moisture levels and a poor rainfall outlook as reasons why investors may be a little too optimistic on the stock right now. 

Credit Suisse cautions that any slippage in rainfall over the coming months would result in downside to Graincorp's 2018 crop. This is given the rainfall outlook is marginally below median levels and due to the fact that soil moisture levels are low going into the 2018 season.  

It notes that the Bureau of Meteorology is projecting below median rainfall for May-July in Western Victoria and median rainfall for other parts of eastern Australia, after rainfall being 'very much below average' during February-April across the eastern seaboard. 

The broker is also discounting any short-term potential upside of Graincorp pursuing a more aggressive restructuring of its storage and logistics business saying it was "not the most likely scenario near term". 

These concerns led the Credit Suisse to downgrade the stock to "Neutral" from "Outperform". 

Bell Potter is more negative, arguing that markets are pricing an above-average 2018 season outcome for Graincorp at current prices. The broker on Monday downgraded the stock to "Sell" from "Hold" given the solid re-rating in Graincorp shares and the somewhat pessimistic outlook for this year's crop season. 

"Traditionally, we  are  comfortable  taking  on  seasonal  risk  in annual  crop  exposures  in  weak  conditions,  however, we  tend  to  favour  stocks  where we see an underlying expansion of through the cycle ROIC and where the stock price is depressed, characteristics we don't see in GNC at current levels," it said in a report. 

The ratings downgrades saw Graincorp shares fall more than 5% as of mid-morning Tuesday. 

The post Bell Potter: Graincorp Ltd shares are a sell appeared first on The Motley Fool Australia.

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Monday saw sleep and respiratory healthcare business ResMed Inc. (CHESS) (ASX: RMD) return some of Friday's 3% gain following a solid 3Q 2018 result, but is now a good time to sell the stock?

While ResMed shares have gained around 12.5% over the past six months, the stock still looks relatively good value compared to listed medical device peers, Cochlear Limited (ASX: COH) and CSL Limited (ASX: CSL).

ResMed is trading on a P/E ratio of 31.2 times, according to Reuters estimates, compared to Cochlear's 48.6 times and CSL's 36.2 times.

It also posted a 3Q 2018 result that was above consensus estimates, with a 32% increase in adjusted profit to US$132.5 million and a 15% increase in revenues of US$591.6 million.

The key factors to consider are whether ResMed can sustain this solid earnings growth following a good 3Q earnings result and whether future earnings growth is already priced into the stock at current levels.

Brokers are somewhat divided on the issue. Some note that while ResMed is trading at a discount to the likes of Cochlear and CSL, it is still trading at a premium to its historical average and the wider ASX/S&P 200 index.

Those more cautious in the market also see risks to the medical devices group's growth outlook given competition in the sleep apnoea mask sector.

Citigroup is one broker in this camp, and says ResMed's current valuation "fairly reflects sustainable top line growth prospects and potential for operating leverage".

The broker also sees risks to ResMed's growth prospects due to the likely launch of new sleep apnoea masks by competitors, noting this increases "the risk that RMD's will not outpace market growth through FY19 in the high margin masks segment".

However, others are more bullish, especially on the sustainability of earnings growth going forward. Morgans is one broker expecting a solid earnings trajectory due to "continued efficiency gains and product development initiatives".

"Notably, operating leverage  continues to improve, which we view as sustainable on the back of stable pricing, further traction in telemonitoring, a "full"mask pipeline and numerous other product development initiatives," it said in a report.

It also believes that the stock should trade at a premium to the broader healthcare market given this strong sustainable profit growth. It maintains an "Add" rating on the stock.

Morgan Stanley is similarly positive and sees ResMed's robust top-line growth continuing due to factors such as a more stable US reimbursement environment for ResMed. The broker also prefers ResMed due to its lower P/E as compared to Cochlear and CSL.

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Brokers are cautious on medical device group, ResMed Inc. (CHESS) (ASX: RMD), ahead of the group's 3Q18 results Friday due to the stock's current valuation levels. 

UBS cut its rating to "Neutral" from "Buy" due to ResMed's recent share price performance, following around a 15% gain in the medical device group's shares over the past six months. 

"… With the stock trading at an EV/EBITDA premium to market of 76% (vs two-year historic average of 50%) we believe the robust earnings growth outlook is largely captured in the share price," it said in a research note. 

"RMD is trading on 29x 12-month forward consensus EPS (FactSet) representing an 86% premium to the ASX200 industrials average. This compares to two-year averages of 24x and 54% respectively". 

The broker also revised up its EPS forecasts by 7%, 3% and 1% over FY18E, FY19E and FY20E, respectively. It also lifted its share price target to US$104 from US$96 due to a move to a DCF-based valuation methodology. 

Macquarie meanwhile, kept its "Underperform" rating on the stock, with ResMed's relative valuation to Australian healthcare peers one reason for the cautious tone. 

"Current valuations for RMD appear fair relative to domestic healthcare peers on a consensus PE/growth basis but slightly expensive based on Macquarie forecasts," the broker said in a research note. 

It added that compared to both Cochlear Limited (ASX: COH) and CSL Limited (ASX: CSL), ResMed's "re-rating has been more substantial." 

The broker has ResMed on a current two-year P/E relative of 18% compared to Cochlear on 13% and CSL on 10%. 

Macquarie added that ResMed's risk/reward profile was skewed to the downside, with its DCF valuation on a price scenario implying 19% downside to the current share price. 

"With scenario analysis showing the risk/reward profile as skewed to the downside as well as noting limited appeal on a PE/growth basis, we see these factors as supportive of our investment rating," it said. 

For Friday 3Q18 result, Macquarie is looking for growth in ResMed's masks and accessories as well as underlying trends in gross margins and any changes to expectations for the effective tax rate in FY19. It is forecasting 3Q18 non-GAAP NPAT of US$124 million. 

As at lunchtime Tuesday, ResMed's Australian shares were down 0.2% to $12.80, while Cochlear gained 1.7% to $185.67 and CSL was up 1.2% to $161.43.   

Broader Australian healthcare stocks also gained, with Primary Health Care Limited (ASX: PRY) up 0.8% to $3.76, Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) up 0.9% to $63.25, Sonic Healthcare Limited (ASX: SHL) up 1.2% to $23.35 and Healthscope Ltd (ASX: HSO) up 0.3% to $2.04. 

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Shares in retail banking and insurance giant, Bank of Queensland Limited (ASX: BOQ), were up more than 2% Monday, despite Citi joining other brokers with a cautious view on the bank's outlook. 

Citi reinstated coverage on the bank stock with a "Neutral" rating amid warnings about revenue headwinds and expenses growth following the bank's 1HFY18 result last week. 

The broker noted that while Bank of Queensland's shares had "underperformed the ASX200 by ~15% YTD and the ASX200 Banks by ~10%, the challenges for BOQ over the forecast period appear to be increasing." 

In particular, the bank faced challenges in terms of competition from micro banks and non-bank financial institutions and the need to remain competitive in a rapidly evolving competitive landscape, the broker said. 

The cautious tone follows Bank of Queensland reporting a 4% lift in cash earnings to $182 million for 1HFY18 and an 8% increase in statutory net profit after tax to $174 million. Its net interest margin (NIM) increased 1 basis point to 1.97%. 

The result saw UBS and Morgan Stanley cut their price targets on the bank last week, with the latter also reducing earnings estimates. 

Citi warned on Bank of Queensland's revenue growth, saying the outlook "appears significantly more difficult" in current market conditions following a period which saw the bank report strong net interest margin growth which offset below system volume growth and challenges in growing other operating income. 

The broker also warned that expense growth was set to resume "at an inopportune time for the bank". 

"Prior tight cost control came to end in this result with cost growth set to resume. Regulatory and digital investments will be undertaken in the immediate term, while the fallout of the Royal Commission on the re-casting of the business practices of Retail Banking to be present into the medium term," it said. 

Citi revised down its FY18 EPS estimates by ~6% mainly due to the weaker outlook for both NIM and other operating income and shaved its FY19 EPS estimates by ~15% due to a combination of the continued weak NIM outlook, lower revenues from the divestment of the St Andrews insurance business and higher costs.  

It also forecast the bank's return on equity to fall to 8.5% from around 9.5% by FY20. 

Citi cut its target price to $11.00 from $13.00 due to changes in its long-term return on equity forecasts.    

In late afternoon trade Monday, Bank of Queensland shares were up 2.3% to $10.59, while shares in Bendigo and Adelaide Bank Ltd (ASX: BEN) gained 4.7% to $10.38 and Australia and New Zealand Banking Group (ASX: ANZ) were up 0.8% to $26.93. 

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Morgans has retained its "Add" rating on beleaguered wealth management group, AMP Limited (ASX: AMP), saying the company's announcement on Friday in the wake of admissions to the banking Royal Commission represents "decisive company action".

On Friday, AMP announced a number of initiatives to accelerate change across the group, including the appointment of former Insurance Australia Group Ltd (ASX: IAG) CEO Mike Wilkins as interim CEO, after it admitted to the Royal Commission that it had misled ASIC at least 20 times over charging customers fees for no service.

"We see the announcement as decisive company action given the large negative publicity and adverse reputational impacts caused by the Royal Commission. Mike Wilkins, former IAG CEO, in our view, will be seen as a safe pair of hands as interim CEO given he is well regarded by the market", Morgans said in a research note.

The broker added that while it was hard not to see long-term value in AMP shares, "execution by a new management team will be key to realising value."

According to Reuters estimates, AMP is trading on a P/E of 14.8 times compared to Magellan Financial Group Ltd's (ASX: MFG) 24.6 times and Perpetual Limited's (ASX: PPT) 13.17 times. The sector is trading on 20.13 times.

Morgans also lowered its target price on AMP to $4.94 from $5.82 with the new target representing a 15% discount to its valuation given the growing regulatory risks facing the wealth management group.

"Regulatory risks for AMP have clearly grown this week in our view…there remains large uncertainty attached to the Royal Commission and how negative its recommendations (released in 2019) will be," it said.

"At the very least, AMP compliance costs will rise going forward, in our view, with other risks like potential additional customer redress and changes to vertical integration, etc, hard to fully dismiss."

Following the Royal Commission revelations, AMP is facing a potential class action from global law firm, Quinn Emanuel Urquhart & Sullivan and pressure is building for the group's chairman to resign.

Morgans said that it did not rule out Board changes going forward but that it didn't expect the costs associated with the company's outlined reviews to be overly material.

The broker did not make changes to its forecasts and said it would review its numbers following AMP's forthcoming AGM on May 10, 2018.

As at lunchtime Monday, AMP shares were down 0.9% to $4.26. Meanwhile, shares in Australia and New Zealand Banking Group (ASX: ANZ) gained 0.468% to $26.85, Commonwealth Bank of Australia (ASX: CBA) was up 0.6% to $72.49, National Australia Bank Ltd (ASX: NAB) was 0.6% higher to $28.55 and Westpac Banking Corp (ASX: WBC) gained 0.7% to $28.80.

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Computershare Limited's (ASX: CPU) share price languished for a third straight session Friday, as brokers remained cautious on the stock despite a positive 2018 investor and analyst briefing from the financial administration group on Wednesday. 

Ord Minnett downgraded the stock to "Lighten" from "Hold" due to a lack of positive catalysts and said there was better relative upside elsewhere. 

"Computershare's valuation is at a premium versus other segments of the market – for example, general insurance or wealth management – and the company needs to achieve significant growth in earnings from some new sources, such as mortgage servicing and cost savings, leading us to turn to a more cautious view," the broker said in a research note. 

"Computershare is trading on its highest one-year forward P/E multiple since 2007, based on consensus, when the business generated a much larger proportion of its revenues from the stable and recurring registry division." 

According to Reuters estimates, the company is trading on a P/E multiple of just over 30 times – a significant premium to insurers and wealth managers and higher than peers.  

QBE Insurance Group Ltd (ASX: QBE) is trading at 12.12 times, while BT Investment Management Ltd (ASX: BTT) is trading at 16.8 times and Perpetual Limited (ASX: PPT) on 13.72 times. Meanwhile, Iress Ltd (ASX: IRE) is trading on 28.22 times and ASX Ltd (ASX: ASX) is on 24.75 times. 

Credit Suisse also notes Computershare's high valuation, and said while the company's growth profile remains attractive, it was factored into the current share price.  

"We maintain our recent downgraded Neutral rating and would need to be more optimistic on either the underlying earnings growth or macro environment to be positive at the current levels," it said in a research note. 

The broker added that while the investor and analyst briefing highlighted that Computershare was delivering on its strategy, it was "difficult to see the stock up significantly again from here" given little change in this strategy and the company's Stage 3 cost outs being weaker than expected.  

Macquarie and UBS also kept their ratings at "Neutral". 

Macquarie said there was limited upside potential given the "absence of near-term catalysts" while UBS said Computershare's medium-term targets in terms of its cost-outs and strategic initiatives for US mortgage services growth "remain short of the levels we believe are required to support at least 10% value upside".  

On Friday afternoon, Computershare's stock was down 1.39% to $16.99, while QBE was up 0.30% to $9.89, BT Investment Management added 0.16% to $9.20 and Perpetual lost 0.85% to $39.47. ASX, meanwhile, added 0.2% to $9.21 and IRESS gained 2.83% to $10.16. 

The post Computershare Limited: Brokers cautious due to high valuation, lack of catalysts  appeared first on The Motley Fool Australia.

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