It wasn’t so long ago that GlaxoSmithKline was the City experts’ favoured pharmaceuticals firm, while AstraZeneca was thoroughly unloved. How times change! Over the past year we’ve seen a series of downgrades to Glaxo’s earnings forecasts (from 114p a share 12 months ago to 80p a share today), along with a swing to negative recommendations; more analysts now rate Glaxo a Sell than a Buy.
Underwhelming Q1 results last month, and the board’s decision to hold the dividend at 80p a share for the next three years, saw bearish analysts reiterate their negative stance, and a number of previously bullish brokers move from Buy to Neutral.
Even Glaxo’s house broker Citigroup sounded downbeat, mentioning — among other things — Glaxo’s “inability to compete on a level playing field in China” (since last year’s bribery scandal) and “constrain[ed] relative commercial effectiveness in the US compared with peers” (due to an onerous US corporate integrity agreement that still has 2.5 years to run).
Nevertheless, private investors taking a longer-term view than CIty number crunchers may feel Glaxo’s shares are attractive at current depressed sub-£14 levels with a juicy 5.8% dividend yield — albeit with the yield being static for three years.
Analysts’ earnings downgrades for Standard Chartered over the past year have been even more dramatic than those for Glaxo, moving from 136p a share 12 months ago to 87p today. Nearly twice as many analysts now rate the troubled Asia-focused bank — which has had a boardroom clear out — as a Sell than as a Buy.
Analysts at Jefferies International are uber-bears on StanChart, and have recently further slashed their target price from 722p to 656p (the shares are currently trading at over £10). Many analysts who are negative on the stock are concerned about the bank’s capital ratios — and the impact of potential asset sales/dividend cut/rights issue — but Jefferies’ analysts are particularly downbeat. They believe that whatever route StanChart takes to improve its capital ratios “the earnings power of the bank is likely to be far below what the consensus expects”.
The consensus currently has StanChart on a P/E of 12, with a dividend yield of 4.6%. On the face of it, the valuation is attractive, but, while I don’t view the bank as bleakly as Jefferies, I think it could be prudent to wait and see exactly what the new chief executive’s plans are.
Mining has been far from the City experts’ best-loved sector for some time. But Anglo American — which currently has twice as many Sell ratings as Buy recommendations — is markedly less popular than its big FTSE 100 peers BHP Billiton, Rio Tinto and Glencore. And earnings downgrades for Anglo American over the past year (from 129p a share 12 months ago to 68p a share today), make the downgrades to Glaxo and StanChart appear downright mild!
Of course, the whole mining industry has been hit by falling commodity prices. Anglo American, though, has seen additional issues; including, a hangover from ill-timed acquisitions, slow progress on asset disposals and labour unrest.
Bearish equity analysts are concerned about the pace of restructuring and cost cutting, and cash flow and dividend sustainability (the yield is currently 5.6%). Global credit ratings agency Fitch has also chipped in, commenting: “Elevated leverage, which was driven by the intensive capital spending of previous years remains a primary risk, in our view, and is reflected in the negative outlook”.
Anglo American’s P/E of 14.5 is lower than its Footsie rivals, but I believe Rio Tinto has a better risk-reward profile.