Shares of explosives maker Orica Ltd (ASX: ORI) are up this morning on the $205m acquisition of GroundProbe.

GroundProbe is a global market leader in the provision of critical monitoring and measurement technologies for the mining sector. The business looks a great fit with Orica's existing Nitro Consult and Blast IQ businesses.

On the accompanying press release CEO Alberto Calderon highlighted the growing importance of digitally enabled blasting and monitoring solutions, both in mining and large scale civil work.

The GroundProbe deal is all cash and is expected to be earnings enhancing over a full years ownership.

Foolish takeaway

I first recommended Orica in late October on the basis of its market leading position globally, and the scope for improvement in its markets in 2018/9. After a period of share price weakness from $20 down to $16, the shares can now be bought for $18. That looks even better value following the GroundProbe deal.

The post $205m acquisition boosts Orica Ltd's share price growth potential appeared first on The Motley Fool Australia.

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Coca-Cola Amatil Ltd (ASX: CCL) has been a dreadful investment over the last 5 years, down 36%. I reckon it may have bottomed, as its defensive qualities become better appreciated.

Coca-Cola Amatil is primarily a Coca-Cola franchisee in Australia, New Zealand and Asia, notably Indonesia. 60% of group revenues come from Australian Beverages, the majority of which are carbonated. The latter market has been in decline, falling 5% in the first half of 2017. However, there are plenty of growth parts in Coca-Cola Amatil too, notably a growing presence in Indonesia and in the Alcohol and Coffee sector.

Judging by the share price you would think that its profits had collapsed over the last few years. In fact they have been resilient.

In 2016 Coca-Cola Amatil reported underlying NPAT of $416m and EPS of 54.7c, both of which were up 6.5% on the previous year. The most impressive statistic for me, however, was that Coca-Cola Amatil generated $390m of free cashflow, its highest for 10 years.

Track forward to the first half of 2017 and NPAT fell 4% to $190m. The EPS decline was lower at 3% due to a $250m share buy back. Return on Capital employed actually increased from 19% to 20%.

The company reports that with pressures in the local carbonated markets starting to abate, it should deliver full year 2017 NPAT broadly in line with last year.

The company is targeting mid-single-digit EPS growth over the medium term. The $80m Richland automation project is a good example of growth, as it will add capacity in growth areas such as juice and dairy. The Richland project is fully funded by the sale and leaseback of its freehold.

Foolish takeaway

Investors have focused on growth stocks and cyclical upturns in 2017. Next year may see an increasing focus on defensive stocks. To my mind Coca-Cola Amatil fits the bill. It also yields an above average 5.4%, fully franked. Will the shares turn? Arguably they already have, rising 6% since an analyst's visit three weeks ago. I think there will be more to come in 2018.

The post Why I think Coca-Cola Amatil Ltd is a buy at this share price appeared first on The Motley Fool Australia.

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It's never easy recommending a share at an all time high. However, the growth momentum of Elders Ltd (ASX: ELD) is such that it is still attractively priced.

Agricultural conglomerate Elders is in the right place at the right time. Last year the agricultural sector grew by 12% to $63 billion. Though it's forecast to moderate to $60 billion in 2018, this is still an industry ripe with opportunities.

I'll leave guessing prices in cattle, wool and grain to the experts, and just concentrate on the metrics of why Elders is a great business for investors.

Last year Elders grew its underlying profit after tax by 40% to $57.7m. With further mid-teen growth expected in 2018, the company trades on a P/E of only 13.8x.

What I like most, though, is Elders ability to generate cash. Last year it converted $85m of EBITDA into $78m of free cashflow. This means that the company was able to pay its interest, tax, dividend and capital expenditure, and still have $78m to spare. It's a sign of a very good business.

That cash was all invested. Half went into acquisitions, the other half to buying out the last of the troublesome hybrid securities, leaving the group free to pay ordinary dividends again.

In terms of balance sheet quality, Elders' return on capital employed is an impressive 27%. Its net debt to EBITDA ratio has fallen from 2.2x to 1.8x in the last year. This gives Elders plenty of opportunity to increase its footprint by acquisition, especially in areas such as financial services.

The other thing I like about Elders is the scope to offer digital technology to the old fashioned agricultural sector. Elders Weather is one such example of the type of value added service that the company is starting to offer to farmers and growers.

Foolish takeaway

Despite its share price run Elders is still surprisingly cheap. With such momentum in the business, I think that there's still plenty of growth left for investors in the shares.

The post Why I think you should buy Elders Ltd at this share price appeared first on The Motley Fool Australia.

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Investors tend to focus on the negatives of the media sector, such as declining print publishing and free to air television. But there are plenty of growth stocks out there too which can be bought at bargain prices.

The first is WPP Aunz Ltd (ASX: WPP). This is the dominant media communications advisory group in the sector, formed by the merger of global leader WPP with STW Communications. It consists of more than 90 businesses, advising the likes of Westpac and Vodafone. Because it is 60% owned by WPP, this stock is easily overlooked by Australian institutions, but for the private investor it's a steal on just 9x earnings and a fully franked 7% yield.

The next is HT&E Ltd (ASX: HT1), which stands for Here, There and Everywhere. Investors will remember it better as the old APN News & Media. It owns several trophy media assets, such as the leading outdoor advertiser Adshel, and radio stations such as KIIS and Gold.

Radio and outdoor advertising are two of the success stories of "old" media. The share price is currently depressed due to the loss of a large Adshel contract, but I'd be surprised if this can't be replaced. On 15x earnings, the shares are not as cheap as WPP, but you're getting some quality assets for the price.

Enero Group Ltd (ASX: EGG) is a much smaller version of WPP Aunz. However, it provides exposure to the USA and UK too, which are now almost 60% of group revenues. Despite re-organisation costs and the uncertainty of Brexit, which led to a reduction in after tax profits in 2017 to $4.9m, free cashflow was a healthy 7.7m. I expect a decent rebound in profits this year, especially in the USA, where the group's technology specialist Hotwire has been boosted by the acquisition of another tech player Eastwick Communications.

Finally, a "hidden gem". Aspermont Limited (ASX: ASP) is the leading information portal for the mining sector. It owns flagship publications such as Mining Journal. The group has successfully transitioned from print to digital media. Aspermont's subscription metrics are very strong, and advertising revenues are picking up now that the sector is in much better health. There is growth yet to come from Events, and expansion into Agriculture. Tightly held, Aspermont is capitalised at just $18m.

The post Why these 4 media shares should be on your buy list appeared first on The Motley Fool Australia.

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2017 hasn't been the year it might have been for index trackers. I examine why, and the lessons investors can draw from it.

I always find it astonishing that just 20 stocks make up just under half of the entire Australian equity market. Five of those stocks – the big 4 banks plus BHP Billiton Limited (ASX: BHP) – make up 25% in their own right.

That feeds through directly into the major indices that funds benchmark themselves against – the ASX100, 200 and 300. Take the ASX100. In the last year it's returned a reasonable 7.4%. But delve a little deeper and you'll find that 64 stocks in the ASX100 have done better than that, including 20 stocks that are up 30% or more.

The lag factor ? The big 5. The performance of the banks has ranged from +1.8% for National Australia Bank Ltd (ASX: NAB) to -3.5% for Australia and New Zealand Banking Group (ASX: ANZ). For all the strong resources performers out there, BHP itself is only up 4.3%.

In other words this has been the year of the stock picker. If you had been in Northern Star Resources Ltd (ASX: NST) instead of index weighted to BHP, you would be up 64%. If you had bought financial stocks  like Challenger Ltd (ASX: CGF) or Macquarie Group Ltd (ASX: MQG), rather than being restricted to the big 4, you would have seen gains of 28% and 18%.

This raises an interesting point. Do you actually need the safety or liquidity of those 5 largest stocks ?

I would argue that for the typical private investor it's simply not necessary. Challenger, for example, is capitalised at $8.5 billion. The business is solid enough for any investor to sleep soundly at night, and if the market did crash, you would have no trouble selling it if you needed to.

For an institution with a mandate to invest, say, in ASX 200 stocks, its main preoccupation is not going to be finding the multitude of gems that add the real value. It's going to be deciding its weightings in the top 5. It simply can't afford to diverge too far from its benchmark index. That's why so many "active" funds are no more than closet index trackers.

For the engaged investor, there are potentially much better returns out there, as 2017 has shown.

The post Why it pays to be a stock picker appeared first on The Motley Fool Australia.

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Shares in HT&E Ltd (ASX: HT1) are down more than 30% in the last year. Investors can now buy a great media company on the cheap.

As it happens, I doubt that many investors will even have heard of HT&E Ltd. It stands for Here, There, and Everywhere.

It was formed earlier this year following the demerger of APN News and Media's New Zealand assets, the purchase of the remaining  50% of Adshel,  and the acquisition of Digital Consonant.

HT&E  now consists of a portfolio of radio, outdoor and digital assets. The best business is probably the outdoor advertising business Adshel. It enjoyed a 14% increase in sales to $105m and a 23% increase in EBITDA to $22.2m in the first half of 2017/18. It's a clear market leader and, as such, I expect these margins to be defensible. It's also successfully adapted its display to allow for digital content.

It is true that the loss of the Yarra Trams contract by Adshel in early October has led to a $15m EBITDA reduction in group forecasts. However, there is every reason to believe that Adshel will be able to replace this work, especially as it now has an extra $20m of capital to deploy into the new business.

The other major division is Radio. HT&E owns trophy stations like KIIS, WSFM, and Gold. Radio has proven a remarkably resilient platform over the years, despite so many technological threats. Yes, audience numbers between rival stations can fluctuate, and in HT&E's case this has led to a 6% fall in its revenues in the first half of 2017/18. But it's still a highly profitable, high margin business, generating $31m EBIT for HT&E on sales of $105m in the first half.

Allowing for lower second half earnings, HT&E now trades on a multiple of around 15x with a well covered 3%+ yield. In my view this underrates the quality of the group's franchises, and the expectation of improved profits in 2018/19.

Foolish takeaway

The mid tier end of the media sector tends to get overlooked, as investors focus on the continued decline of print publishing and free to air television. That has left strong companies like HT&E, Southern Cross Media Group Limited (ASX: SXL) and WPP Aunz Ltd (ASX:WPP) that have defensive market positions. I think that investors should carefully re-appraise all these stocks in 2018.

The post Why I think HT&E Ltd is a strong buy at this share price appeared first on The Motley Fool Australia.

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Since then, it's been upside only for Qantas as all these problems have reversed themselves. In addition, a  huge share buy-back programme has reduced shares in issue by 18%.

Analysts' forecasts have been consistently upgraded over the period. Qantas is now forecasting half year profits of $900-$950m, compared to $850m the previous year.

But industries don't get much more cyclical than airlines. What goes up must eventually go down. In fact, there are signs that this is already happening, with the shares off 11% in the last month.

There are a number of factors that are now starting to come into play:

Firstly, there's oil prices. They're up 20% in the last three months. At its AGM in late October, Qantas CEO Alan Joyce warned that conditions were likely to toughen in the second half, in large part due to that rise in fuel prices.

At the then price of A$74 per barrel, he said that fuel would likely cost Qantas $3.2 billion v $3 billion in 2017. Readers should note that since then, the A$ price of oil has risen a further 3.4%.

Secondly, Joyce also warned that more international capacity growth would affect unit prices in the second half. That's coming on the back of a 3% increase in competitor capacity in Q1.

Thirdly, there's the question of the scope for further cost reductions. In 2014, as part of its major and successfully implemented strategy update, Qantas announced $2 billion of cost reductions by June 2017. Having achieved these, the scope for cost and revenue improvements is now reckoned to be $400m p.a. That's no mean feat, but the heavy lifting has arguably already been done.

Foolish takeaway

The strong earnings momentum that has propelled the group's share price may now be coming to an end. Arguably, half year earnings will represent the high point. On that basis, I reckon it's time for Qantas shareholders to take their profits.

The post Why I think you should sell Qantas Airways Limited shares today appeared first on The Motley Fool Australia.

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Real estate investment trusts (REITs) like Charter Hall Group (ASX: CHC) have defied the doubters this year, with rises in interest rates not materialising and industrial, commercial, and retail demand remaining solid.

None more so than Charter Hall. It grew its profits after tax by 19.7% to $257 million in 2017, and its operating earnings by 18% to 35.9c. At the end of first quarter of 2017/18,  funds under management stood at $20.4 billion. That's up almost $3 billion in the last 15 months.

In deciding whether I think Charter Hall is a buy, sell or hold, I've taken no particular macro view. I only make the general comment that property has always had a tendency to "climb a wall of worry." Rather I look at Charter Hall's performance metrics and valuation fundamentals.

Charter Hall's net asset value is $3.60. It's share price is $6.20. That's a massive 72% premium to NAV. It's worth noting that peers such as GPT Group (ASX: GPT) and Cromwell Group (ASX: CMW) trade on only 7% and 16% premiums respectively.

You are paying a hefty price for quality in buying Charter Hall, unless you take the view that the others are absurdly cheap. I don't.

The other major factor to consider is dividends. Growth in Charter Hall's dividend last year was 11.5%, to an unfranked 30c. That's no mean feat but still much lower than earnings growth of 18%. Last year's payout ratio was 85%, although this is at the bottom end of the company's future payout guidance of 85-95%. The upshot is that at 620c, Charter Hall shares yield a modest 4.8%. Compare that with Cromwell Group, for example, which yields 8.3%.

Foolish takeaway

With analysts forecasting a moderation in earnings growth in 2018, I just can't see Charter Hall's lofty valuation allowing for further share price appreciation, and quite possibly the reverse. I would avoid, and, if I were a holder, I would be inclined to take profits.

The post Is it too late to buy Charter Hall Group shares? appeared first on The Motley Fool Australia.

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In this article, I argue that the focus on executive remuneration has gone too far.

In the year to June 2018, Mineral Resources Limited (ASX: MIN) delivered an 83% rise in profits and dividends.

Its share price rose 29% to $10.85, compared to 8.2% for the All Ords. Since the year end, and following publication of these results, its shares have risen another 85% to $20. Over the whole period, the company's market capitalisation has risen by $2 billion.

If I were a holder, I would be quite happy with that, thank you very much! But no, at the AGM earlier this week, proxy advisers managed to get 41.5% of shareholders (I presume nearly all institutions) to vote against a $2.1 million rise in remuneration for CEO Chris Ellison. $2.1 million against $2 billion? Good luck to him I say.

Also this week, Qube Holding Ltd (ASX:QUB) was heavily chastised for having its chief executive's short and long term bonuses linked to a rise in shareholder value.

There are many large ASX companies that are not delivering, either operationally or in share price terms. Yet their senior management generally receive pay increases, or at worst stay flat. It's all but unheard of to take a cut. Yet proxy advisers rarely make a fuss.

I would prefer that they targeted their ire at these companies, not the successful ones that are making shareholders money.

I also don't recall proxy advisers objecting to executive bonuses at Wesfarmers Ltd (ASX: WES) when the ACCC found that its Coles subsidiary had engaged in unconscionable conduct with its suppliers.

Or more recently, Lend Lease Group (ASX: LLC). Three employee deaths have occurred on their sites in separate incidents in the last year.

Corporate governance has simply gone mad, in my view, when it comes to executive remuneration.

In fact, in Qube's case, the Remuneration Report goes on for 23 pages. That's 5 pages more than the operational reports about the business!

That length of remuneration report may be good for remuneration experts, proxy advisers and the printing industry, but not for me. Arguably not even for the Board of Directors. Their time becomes distracted from what I as a shareholder really want them to do. Run the business.

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Shares in Vicinity Centres Re Ltd (ASX: VCX) are little known despite being in the ASX 100. I believe that they offer tremendous value for retail investors.

Vicinity was essentially created in late 2015, following the merger of the old CFS Retail Property and Centro property assets.

Despite having a share price that has gone backwards since then, merger synergies have gone entirely to plan. A mixture of divestments, acquisitions and development projects have seen total shareholder returns since then of 14.1% per annum. Over the period, NTA has risen 15.1% to 282c.

The group has also reduced its gearing by 3.3 points to 24.7%. This balance sheet strength has enabled Vicinity to recently buy back $230m of its own stock, at a 6% discount to NTA.

The record, therefore, is strong.

Occupancy rates are currently 99.5%. Understandably, the market is concerned with the Amazon threat, but companies like Vicinity are hardly standing still either in response to the threat. For example, it's major redevelopment at Chadstone will include a 250 room 4-4.5 star hotel.

The group is also going up the value chain, for example swapping a 49% interest in Chatswood for three prestige Sydney CBD assets.

Vicinity intends to pay out 100% of its Funds from Operations (FFO) as dividends.  At its AGM last week the company gave guidance that it expects FFO to be 18.0c to 18.2c. That's equivalent to a net yield of 6.7%.

In terms of valuation relative to its peers, the buy case for Vicinity is strong. It trades at a discount to its NAV, compared to 7%-13% premiums for Scentre Group (ASX: SCG) and Shopping Centrs Austrls Prprty Gp Re Ltd (ASX: SCP). It's 6.7% yield compares favourably t0 5.8% and 5.2% for Scentre and SCA.

Foolish Takeaway

For income-hungry investors I like the Australian retail property space. For all the gloom around, the best operators are still growing, not shrinking. At the current share price Vicinity is my pick of the bunch.

The post Why I think it's time to buy Vicinity Centres Re Ltd shares appeared first on The Motley Fool Australia.

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Over the last 18 months Westfield Corp Ltd (ASX: WFD) has massively underperformed the ASX 100 Index. There are already signs that this is starting to change.

Here's why I think Westfield is going to be a great stock for patient investors in 2018:

Firstly, you are buying into flagship retail assets, primarily in the USA, the UK, and soon Europe. Flagship shopping centres attract higher occupancy levels than out-of-town centres. Westfield is currently enjoying occupancy rates for its flagship sites of over 95%.

Secondly, in its recent third quarter update, Westfield reported that those flagship malls are delivering above average retail sales growth of 3.1%. The fact that its tenants are by and large growing has enabled Westfield to raise rents by an astonishing 9.5% over the last year.

Thirdly, the portfolio is far from static. $3.8 billion is being invested into current projects, at an estimated yield of 7-8%. A further $6 billion is being earmarked for projects in pre-development stage, including Milan.

Fourthly, Westfield is growing its earnings again. Earnings should increase between 3%-3.5% in 2017 to the AUS dollar equivalent of around 45 cents per share. This should accelerate further over the next couple of years.

The group is forecasting a AUS dollar equivalent 34c distribution for the current year. That represents a yield of 4.1%.

Finally, over the last 18 months, Westfield shares have fallen 21% compared to a positive Index return of 11%. However, there are definite signs that share price momentum is starting to rebuild. Over the last two months, Westfield shares have returned double the index. Brokers are turning increasingly positive.

Foolish takeaway 

Although Westfield is not exactly cheap, quality never is. I expect the shares to ride improving investor sentiment into 2018.

The post 5 reasons why Westfield Corp Ltd is a buy at this share price appeared first on The Motley Fool Australia.

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Shares in printer PMP Limited (ASX: PMP) are currently down 32% after warning that 2018 profits will be substantially lower than expected. There may be worse to come.

The group has warned today about the effect of pricing pressures, and short run work leading to lower efficiencies. As a result, it has downgraded 2018 EBITDA forecasts from $70m-75m to $50-55m, and 2019's forecasts from $90m-100m to $70m-$80m.

The merger of PMP and IPMG was expected to deliver $55m of cost savings. In total $43m have already been achieved, but the final $12m has been delayed. It will cost a further $29m to achieve the full synergies.

Despite the fall today, I would not be rushing to buy PMP. The revised 2019 forecast of 40% growth still seems optimistic to me. A bad industry will normally defeat a good management team.

Volumes and margins seem to be inexorably downwards. Although the merger with IPMG was entirely sensible, PMP will have to run very hard to stand still in my view. A multiple of 7x EBITDA in a declining sector is still too rich for me.

The post Why the PMP Limited share price crashed 32% today appeared first on The Motley Fool Australia.

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Shares in Stockland Corporation Ltd (ASX: SGP) have flatlined for the last two years despite delivering good growth. I expect the shares to outperform in 2018.

What I like about Stockland is its exposure to diverse assets. The group has significant interests in retail shopping centres, logistics and business parks, residential developments and aged care homes. The latter provides some immunity from cyclicality, while residential is not at the top end of the market, where the risk of price falls attracts so much media attention.

Having said that, Retail Town Centres remains Stockland's largest profit contributor. It's worth noting that in a year in which retail as a whole struggled, Stockland was still able to lift its operating funds by 4.1% to $419 million.

Stockland is particularly adept at recycling its portfolio into higher growth areas. The major $400 million development at Green Hills NSW is already 82% leased, with the next stage opening this month. Across the portfolio, the weighted average lease expiry is 6.6 years.

The next most important profit centre is residential development. Last year it delivered a 16% rise in profit to $270 million. Its return on assets is an excellent 15%. The job market is stable, interest rates are low, and the supply of new builds seems to be constantly limited by planning constraints. Sensibly priced residential developments in the outer suburbs are a far cry from expensive inner city living.

In terms of balance sheet utilisation, Stockland's overall return on assets has increased from 11% to 11.4%. Gearing is a very modest 22%. The average cost of that debt is only 5.5%. Should the sector hit difficulties, Stockland is best placed to ride it out or take advantage of it.

Other plays in the sector are cheaper, but for reasons. Lend Lease Group (ASX: LLC) has greater geographical diversity but a troublesome Australian construction business. Mirvac Group (ASX: MGR) is more exposed to the inner city apartment market -potentially the most exposed property segment.

Stockland re-iterated guidance with its AGM/Q1 update last month. The group expect a further 5%-6.5% rise in Funds from Operations implying around $850 million. The distribution per security is expected to rise 4% to 26.5 cents. On that basis the shares yield 5.8%.

Foolish takeaway

When it comes to property, it it always pays to buy quality. Even on a 10% premium, Stockland is my preferred stock pick in the sector.

The post Why I think Stockland Corporation Ltd is a buy appeared first on The Motley Fool Australia.

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JB Hi-Fi Limited (ASX: JBH) has underperformed by 24% in the last year but rivals have stormed ahead. I believe the valuation disparity is now far too high.

At its AGM last month JB Hi- Fi reported solid like-for-like growth of 3.2%.

That's actually quite respectable considering that Good Guys diluted that growth. Most importantly, overall sales guidance for 2017/18 was re-affirmed.

But analysts' reaction was muted at best, and the shares have fallen further since. Compare this to Kogan.com Ltd (ASX: KGN), whose shares are up 11% this morning, and an amazing 170% for the year after reporting 36% quarterly revenue growth.

Fair enough, you might say. Well, maybe, but it is worth remembering that Kogan is a minnow in sales terms at around $400 million, compared to $6.8 billion for JB Hi-Fi.

While JB Hi-Fi has been slow to capitalise on the digital space, it is making progress. I still have a view that the customer likes to "touch and feel"what he's getting, as well as the technical input from staff. Not everyone is ready made tech savvy ! Yet, far from being everyone's Good Guys (if you pardon the pun), JB Hi-Fi is perceived as the fall guy between the soon to arrive Amazon and the likes of Kogan.

JB Hi-Fi is a well run business. For example, it has been able to extract the promised $15m -$20m synergies from the Good Guys acquisition a year ahead of schedule. I would not be surprised if there is more to come.

Return on Equity is over 20% and cashflow is strong. The company stressed at the AGM that it has been able to grow its dividend at 12.7% compound over the last five years. In my view that's code to me to expect a further dividend increase at a higher rate than earnings.

The payout ratio currently is only 54% so there is plenty of scope to do this. The shares prospectively yield a net 6%, fully franked.

Foolish takeaway 

My view is that the market's positive reaction to Kogan, far from hurting JB Hi-Fi, will actually help it. Whereas Kogan trades on a prospective multiple of 27x, JB Hi-Fi trades on just 10.8x. I reckon the shares are due a good rebound ahead of Christmas, and quite possibly a longer term re-rating.

The post Why I think JB Hi-Fi Limited is a buy at this share price appeared first on The Motley Fool Australia.

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Shares in online marketplace Carsales.Com Ltd (ASX: CAR) are up more than 30% this year. For a variety of reasons, I recommend taking profits

Firstly, although Carsales focused on 13% growth in revenue at its last results, that excludes Finance and Related Services.

In my view, it's one thing to exclude discontinued operations, but quite another to downplay continuing business just because it happens to have done badly! Add them back, and net profit after tax was actually flat at $109m.

That leads onto a second issue that bothers me, namely that $9.2m of labour costs associated with technology development have been capitalised. That's up 11% on the previous year too. I would prefer to see costs such as these expensed, especially as they are likely to be recurring.

Thirdly, there is a long way to go for the group's international operations, primarily in Latin America, to turn a meaningful profit. In fact, international recorded a small loss in the year. In addition Carsales took a $7.1m write down on its investment in ICar Asia.

Finally, I come to forecasts for the year to June 2018. Analysts are expecting 11% growth to 54c-55c earnings per share.

But that's surely influenced by the "adjusted" earnings from last year of 49.4c, whereas the net earnings were only 45.4c. I think it's going to be a tall order for Carsales to get from 45c to 54c on an outlook that the company described at its AGM as merely "solid".

Foolish takeway

On my numbers, Carsales trades on a multiple of 29x. That seems very full to me for a business whose growth in its core Australian market is only a fraction of that.

Carsales is still a great business, but I would be inclined to take profits after such a good run. I have expressed similar sentiments about the real estate online portal REA Group Limited (ASX: REA).

The post 4 reasons to sell Carsales.Com Ltd shares right now appeared first on The Motley Fool Australia.

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Shares in diversified industrial group Downer EDI Limited (ASX: DOW) have slowly clawed back their losses since announcing their takeover of Spotless in the spring. I believe that investors will reap the benefit of the deal in 2018 as the market starts to rate its earnings more highly.

Although Downer was well spread in areas such as Transport, Utilities, Rail, Mining and Infrastructure, the $1.3 billion Spotless acquisition adds high-quality long-term service revenue in cleaning, catering and workwear.

The market fixated initially on the 59% premium that Downer paid for a business that was struggling at the time, without considering the synergies and benefits that Spotless will bring to the group, including cost savings of $20-$40m.

I believe that those forecast savings could be understated. After all Spotless has revenues of $3 billion and last year it lost money. In the previous year Spotless reported EBITDA north of $300m. The turnaround potential under Downer's 88% ownership is enormous.

In the meantime, all the valuation and business quality metrics that I look at are favourable.

For example, last year, Downer generated operating cashflow of $441m representing 103% conversion of its EBITDA. Over the last five years, Downer has made an impressive average return on invested capital of 19.6% In terms of its forward order book at year end, that was $22.5 billion, which is a healthy 7% up on the previous year.

Foolish takeaway

Downer's review of Spotless should be complete by the end of November, when a full trading update will be provided. It's worth noting that Downer has met guidance for the last seven years running. I back management to continue to deliver, with potential upgrades to forecasts based on Spotless. I expect a healthy re-rating of the group to emerge as we go into 2018.

The post Why I think Downer EDI Limited ticks all the boxes for investors appeared first on The Motley Fool Australia.

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Shares in leading media agency WWP Aunz Ltd (ASX: WPP) have fallen more than 20% since they warned less than a month ago that full year 2017 profits would be marginally down from last year's $121m. I think that yield or special situation investors should take a very close look at it.

WPP Aunz was formed in early 2016 following the merger of global leader WPP's Australian and New Zealand assets with STW Group to create the region's larger advertising and media communications group.

The group acts for a vast range of blue-chip clients, including Westpac Banking Corp (ASX: WBC), Vodafone and Westfield Corp Ltd (ASX: WFD).

Notwithstanding the well publicised woes of traditional media plays like Seven West Media Ltd (ASX: SWM) and Fairfax Media Limited (ASX: FXJ), WPP is agnostic about the form that advertising takes. It has been adept in advising and winning business in the digital space, which is growing at 7%-8% p.a.

The fact that WPP Aunz is 61% owned by WPP make it under owned by local institutions. This creates a value opportunity for private investors, with the stock trading on a P/E of just 9x.

However, the real opportunity here, is the obvious takeover potential. An acquisition of the WPP Aunz minority by WPP is likely to be earnings enhancing to WPP.

There is no suggestion either that the terms of any future offer would be oppressive to minority shareholders in WPP Aunz. This is already evidenced by the merger of its interests with STW, which created value for all concerned.

In the meantime, WPP should pay a fully franked 6c dividend for the year to December 17, which is a tremendous grossed up yield of 10%. There is no suggestion that this dividend is under any threat.

Foolish takeaway

I believe that investors should be tucking WPP away in their portfolio for yield alone, and patiently wait for WPP to make its move at some point in the future.

The post Why WPP Aunz Ltd is a fantastic each way bet appeared first on The Motley Fool Australia.

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Shares in building products group CSR Limited (ASX: CSR) are 16% below their peak for the year of $5.24. For a variety of reasons, I think that the stock is compelling value at the current price of $4.39.

First and foremost, the shares are cheap on valuation measures. They trade on just 10.7x consensus net profit forecasts, and a yield of 6.1% (50% franked).

Secondly, despite the discount rating, the quality of the business is high. Earnings have grown for the last five years, EBIT margins are in the healthy mid teens, operating cashflow is strong, and CSR has no debt.

Thirdly, I believe that concerns about the one thing that always holds CSR back, the housing market, are overblown.

It's not about top end property prices, it's about new build in the residential, commercial, industrial and infrastructure sectors. The first three are forecast to remain strong, while substantial growth is expected in infrastructure.

Dealing specifically with residential housing, the macro-economic indicators are favourable, as is the main micro-economic one, namely the constraints put on supply by planning regulations.

Following this theme, an even cheaper, smaller stock that should be on investors' radar is AV Jennings Ltd (ASX: AVJ).

This residential housebuilder constantly gets tarred with top end apartment glut/falling prices talk, yet it actually serves the low to mid tier of the East Coast market. Far from a glut, there is actually a shortage of new build in that space.

Like CSR, AV Jennings has delivered for several years now. In fact, over the last three years earnings have grown at 23.8% compound.

Yet despite this record, the group trades on a 31% discount to NAV. This is even more astonishing given that NAV has been steadily rising, not falling. But the main thing that should attract investors here is the fully franked 5c dividend, which grossed up, gives a yield of 10.4%.

Foolish takeaway 

Because of the market's fixation on house prices, not housing demand, stocks like CSR and AVJ Jennings are very cheap. This despite them having extremely strong franchises. Both stocks are well off their highs, and offer compellingly high yields.

The post CSR Limited & AV Jennings Ltd: 2 bargain shares built to last appeared first on The Motley Fool Australia.

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A proven strategy for investors considering buying shares in DuluxGroup Limited (ASX: DLX) is to buy for yield and hold for growth. I expect this magic formula to continue as we approach this year's full results, which will be announced to the market next Wednesday.

Any weakness could be an opportunity for long term investors.

DuluxGroup is the owner of well-known consumer and commercial brands such as Selleys, British Paints and, of course, Dulux.

The company always seems to defy expectations that any slowdown in house price growth will hinder it. This is because 65% of its day to day business is in home improvements, which, far from being cyclical, have proven time and again to be defensive.

One of the key strengths of DuluxGroup is that its brand power enables it to generate above industry EBIT margins. This allows it to invest heavily in its business to perpetuate these margins. For example, last year, of the $166m operating cashflow that the group generated, it invested $85m in capital expenditure.

The main recipient of this capital investment has been a major new paint facility that is expected to open shortly within its $165m budget. The scale and efficiencies that this will provide will give the company a long term competitive advantage in its core market.

The rest of its cashflow goes back to shareholders in dividends. Last year DuluxGroup was able to raise its dividend 8% to 26 cents.

The shares trade on a prospective grossed-up dividend yield of 5.0%. Dividends have already risen 62% in the last six years. While past performance is of course no predictor of the future, it's about as good a guide as we have to where future dividends are likely to head.

Foolish takeaway

On the face of it, a rating of 20.5x is hardly cheap. However, Dulux Group is one of those high-quality stocks that always seems to end up looking cheap in 2-3 years' time. That's what makes it a core industrial holding in long term investors' portfolios.

The post Why I think DuluxGroup Limited shares look a buy appeared first on The Motley Fool Australia.

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Shares in Brambles Limited (ASX: BXB) have been held back by concerns about a possible class action arising from a profit downgrade in February. This looks like a kite flying exercise to me, and investors are missing out on the organic growth that Brambles Limited is delivering.

The fact is that Brambles did eventually meet revised market expectations for its full year results.

Earnings were flat at 48c, but sales growth was 5%. That is impressive for a mature business that involves pallets and containers under the CHEP brand.

That sales growth has continued into Q1, with a further 6% sales growth being reported. CHEP Europe is particularly strong.

North America, which is Brambles Limited largest market, has been growing steadily for the last two quarters. Analysts are now expecting earnings growth of 11% for the current year.

It's worth remembering that Brambles is a high-quality business.

The company is market leader in every major region that it operates. Returns on Capital are a high 17%, and the balance sheet is strong with EBITDA cover of 15x. Dividends are currently partially franked and well covered at 29c per share (a useful 3% yield), with growth expected.

Another thing I like about Brambles is that it has been happy to start a greenfield data/technology business for the logistics sector, BXB Digital, without resorting to an expensive acquisition.

The group will invest a further $17m in BXB Digital this year. In time BXB Digital will be an important profit contributor in its own right.

So what about the class action? Well, as a former litigation funder myself, two things suggest to me that the danger may be overstated. Firstly, it has taken nine months for the possibility to even rear its head and secondly the claim period is only four months and for relatively limited share price falls.

Class actions are notoriously expensive and bookbuild (claim size) may simply not be high enough to justify proceeding. And that's if there is a case to answer in the first place.

Foolish takeaway 

Shares in Brambles Limited are still 30% off their peak in 2015. With organic growth building up again, this is a good time to reload on the stock, especially for investors looking for exposure to overseas earnings.

The post Why I'm a buyer of Brambles Limited shares today appeared first on The Motley Fool Australia.

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