The Downer EDI Limited (ASX: DOW) share price is making a tentative recovery from yesterday’s big drubbing as leading brokers pass judgement on its half-year profit results.
The profit results sent the stock crashing around 5% on Thursday but the DOW share price is trying to claw back some of the loss with a 0.6% gain to $7.26 this afternoon when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is down 0.5%.
Citigroup reiterated its “buy” recommendation on the stock in the wake of the results even though the broker acknowledged that it was far from perfect.
The good, bad and ugly
“Downer’s 1H19 result was characterised by segmental earnings missing our forecasts and was compounded by a change in segment reporting making comparability difficult,” said Citi which put a price target of $8.50 on the stock.
“However, we maintain our Buy rating as the investment thesis remains unchanged. Downer’s Transport, Utilities and EC&M businesses are leveraged to the increasing infrastructure and resources capex in Australia and we see medium-term upside from operations and maintenance of the rail and road networks.”
Meanwhile, Macquarie Group Ltd (ASX: MQG) described the results as “in-line” and “clean” although it pointed out that Downer was not immune from broader industry issues as it struggled with two underperforming projects.
Diversified property and construction group Lendlease Group (ASX: LLC) also had to make provisions late last year on small handful of problematic infrastructure projects.
These construction companies are reluctant to reveal much details about the troublesome projects but Macquarie estimates that the two projects shaved around $20 million off Downer’s earnings and accounted for 90 basis points decrease in margin for its EC&M division.
“The pain has been taken in this half and DOW expects to see 2H margin pick-up; of course delivery here is important,” said Macquarie who has an “outperform” rating on the stock with an $8.13 price target.
“DOW has a good record re risk management over the last 8 years & also benefits from scale & diversity which allows it to absorb issues within guidance.”
Deutsche Bank also expressed disappointment at the news of the two projects and the weaker than expected group earnings.
However, it too is sticking to its “buy” recommendation with an $8.26 price target as the stock is cheap.
Downer is trading around a 14 times price-earnings (P/E) and consensus is forecasting double-digit earnings growth for the group.
Investors should use any price weakness as a buying opportunity.
For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..
But knowing which blue chips to buy, and when, can be fraught with danger.
The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2019."
Each one pays a fully franked dividend. The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.
Click here to claim your free report.
- NEW: Free report names top 3 ASX dividend shares to buy for 2019
- Top analysts name their top 3 ASX blue chip shares for 2019
- Richest man alive issues dire warning
- 3 quality dividend shares to boost your income
Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019