In this section we provide readers with three stocks that have attracted the interest of the broking community or the ‘herd’. Broker recommendations tend to be biased and highly optimistic. We try and breakdown these barriers and give our own honest opinion. It is important to keep in mind that technical analysis is only one part of the investment process and any recommendations do not give consideration to the underlying fundamentals of each business.
Corporate Travel Management – Current Price $22.93 – Is a provider of travel management solutions to the corporate market and has offices throughout Australia & New Zealand, the USA and Asia. The company is a member of the GlobalStar network of 70 travel management companies which allows the provision of international service for clients. CTD is the ten times winner of the AFTA award for Australia’s Best Corporate Travel Management Company. It is also the travel management company of choice for over 20 companies listed on the ASX 200. From its humble beginnings of having just two people, the company has grown to become one of Australia’s largest travel management companies. It now employs over 2,200 people and provides services in more than 70 countries.
Broker View: UBS (NEUTRAL $23.90) – The broker has initiated coverage with a Neutral recommendation. The broker has quite a positive review following 15 acquisitions since listing and has an impressive track record of being able to integrate these businesses and extract significant value.
Unconventional View: We are more bullish than UBS. CTD has been a market darling achieving +70% in capital growth over the year. Since its listing in 2015 at 20c the stock is up a phenomenal 11,700% and we think it’s will continue. If you haven’t noticed already, the tourism industry is booming. As a result stocks such as WEB, SYD, FLT and CTD have gone on a tear. As one boom ends another one begins. The tourism boom has been fuelled by a lower A$ and cashed-up overseas visitors looking to travel here for leisure. It’s the opposite of the mining boom. During the mining boom times people were cashed up and were travelling overseas, foreigners stayed away from Australia because the dollar was too high and it was expensive. That’s all reversed. The dollar has flipped and more people are travelling here than ever, especially the Chinese. It has led Australians to travel domestically rather than overseas because it’s cheaper. Australians are more likely now to take a holiday in Byron Bay than in Spain. The same goes for corporate travel. More corporates are travelling to and from work within Australia, not just for holidays but also for work and study. There are travel trends that we see continuing over the next decade. Chinese tourists will continue to travel to Australia for leisure in record numbers. As long as our dollar stays low, tourism will continue to boom. And finally Millennials love to travel and they represent one of the largest travel markets. For that reason, we believe this underlying thematic will continue to thrive. Sydney Airport continues to post record traffic numbers so there is no indication that this thematic is slowing. For that reason, we think CTD is the perfect stock to jump on. Sure it’s expensive, it trades on a PE of 50x. But its ROE is high and its EPS growth is 20%. As long as it can continue to deliver, the share price will rise. As with any high PE stock, the downside risk of a sudden fall is higher. For that reason we advise those buying to set a 10% stop loss. On the chart the stock is in a solid uptrend making higher highs. We adviser to buy on this bullish uptrend.
Austal – Current Price $1.84 – Is an Australian ship manufacturer based in Alamaba USA. It designs and manufactures defence and commercial ships for Governments, Navies and Ferry operators around the world. Business units comprise ships, systems, and support. Its prized ship is the Littoral Combat Ship built for the US Navy and military high speed vessels for transport and humanitarian relief, such as the Joint High Speed Vessel (JHSV) and High Speed Support Vessel (HSSV) for the Royal Navy of Oman. Austal also makes the Cape Class Patrol Boat Program for Australian Customs and Border Protection.
Broker View: Macquarie (OUTPERFORM $2.09) – The broker has a bullish view on the stock after it won its 14th contract to build another Littoral Combat ship for the US Navy for US$584m. Macquarie sees the upside potential from this opportunity to build more vessels in the near future.
Unconventional View: We agree with Macquarie. It’s been a rocky road for Austal but the ship maker is regarded as the best inthe world. It has consistently built world class high speed vessels for the US Navy and is dubbed the ‘corvette of the seas’ . The Littoral Combat Ship is a work of art and is the envy of almost every navy. The problem with Austal however is that it is a very capital intensive business. Building ships isn’t cheap. The company generates +$1 billion in revenue yet it only produces a NPAT of $44 million. And that’s fine. The problem however occurs when contractual requirements change. Back in 2016, the Pentagon and US Naval Sea Systems Control imposed a new set of building standards. The cost of modifying the Littoral Combat Ship to meet the shock rating change and US Navy rules was a lot more than the company estimates. To be exact it was $115m. During Obama’s tenure, the Pentagon took deep budget cuts. That involved delaying the purchase of two ships which hit Austal’s bottom line. The Obama administration wasn’t too keen on building expensive warships saying they lacked firepower and survivability. However things have changed since Trump came into power. Austal may prosper from Trump’s presidency after he flagged plans to build up military hardware. Trump’s campaign committed to expanding the US Navy’s fleet from a current level of about 286 vessels to 350 and Austal is in prime position to benefit. But this makes Austal heavily reliant on the US Navy. So there is a flip side. Austal is deeply exposed to policy changes, delays and cancellations by the US Government. We know that Austal can deliver and manufactures state of the art ships, but it can’t prevent factors out of its control. That’s a worry. For the moment though, things are going well and are very positive to the business. The recent contract win is a massive leg up for the company. ASB even expects another 26 Independence class ships to land on its order sheet soon. Austal has delivered five vessels already, with a sixth soon to be handed over. On the chart the stock look attractive. ASB is in a short term uptrend and looks to be making higher highs. Investors should be buying at these levels. But as mentioned before, ASB is a volatile stock, there are many factors outside its control that can change its fortunes overnight.
Coca-Cola (CCL) – Current Price $9.13 – Has launched its fourth sugar-free or low sugar version of the Coca-Cola beverage. This time the company is claiming to have cracked the elusive taste of the original without using sugar. In-fact its labelled “Coke No Sugar”. The new beverage will replace the Coke Zero product. The big difference this time around is that Coke No Sugar tastes just like Coke should that’s the heavily sugar-laden version based on a 130-year-old recipe. So far the original taste has never been perfected without using a stack of sugar.
Broker View: Credit Suisse (OUTPERFORM $10.30) – The broker has upgraded to Outperform from Neutral and doesn’t believe CCL is in trouble or that this downgrade is evidence of a structural decline for Coca-Cola. The broker think it’s merely a temporary headwind. CCL will still be able to achieve stable margins and slightly higher prices boosted by a second $100m cost reduction program.
Unconventional View: We disagree with Credit Suisse. Either the analyst is a heavy Coca-Cola drinker or is not in touch with reality. It’s pretty obvious what’s happening here. No one drinks Coca-Cola anymore and I doubt anyone will drink Coke No Sugar either. The geniuses at Coke say they’ve finally cracked the code by launching a brilliant ground breaking new sugar free coke, unfortunately they’ve done this a few times before. Remember Coke Zero, Diet Coke and Coke Life? Weren’t they all sugar free? What’s happened here is Coke have simply rebranded Coke Zero to Coke No Sugar. Pure genius. I wonder how much they paid their marketing team to come up that ridiculous idea. First there was diet, then zero and then came a stevia sweetened bevvy hit the shelves. I wonder what mysterious sugar replacement Coke No Sugar has in it. I delved a little deeper to find out that Coke has the same artificial sweeteners that’s inside Coke Zero. The only difference is that Coca-Cola No Sugar tastes the same as the original Coke. So it contains aspartame and acesulfame potassium. Right. So in other words instead of getting fat you’re now exposing yourself to chemicals that can cause Alzheimer’s disease, birth defects, diabetes, ADD and Parkinsons disease. Here’s the other problem: People who love the taste of Coke Zero are now left disappointed with this new replacement. They actually preferred the taste of Coke Zero.
Either way, we just can’t get excited by this stock. The fizz is gone and it’s not coming back. Wethink the drink company is caught in a structurally declining sector. The reality is consumers are shifting away from full sugar soft drinks. The impact will continue to be felt as the demand in products such as bottled water rise. CCL has debt of $992.8m and a debt to equity ratio of 118% which makes this stock quite risky. Trading on a PE of 28x. The chart isn’t pretty. CCL has broken its short term uptrend support line and looks to be heading lower. We recommend investors avoid.