There is a special cluster of industrial mid-caps on the ASX that are perennial crowd-pleasers, stocks that under-promise and over-deliver every reporting season, forever in an upgrade cycle.
In contrast, the broader market has seen earnings forecasts trending lower as slower growth and lower sentiment take their toll. So, against this backdrop, the continuous upgrades of the crowd-pleasers stand out like a sore thumb. They do come with a price tag, of course, and they always have… yet their share prices keep on rising.
In this episode of Buy Hold Sell Jelena Stevanovic from Platypus and James Miller from Firetrail Investments pass their verdict on three of these crowd-pleasers and each share a stock that they believe could surprise the market with an upgrade.
Jeremy Hook: Welcome to Buy Hold. Sell. I'm Jeremy Hook from TMS Capital. With me on the panel today is James Miller from Firetrail and Jelena Stevanovic from Platypus.
What we're looking at today: in an environment where earnings post reporting, and for the last few years have basically been going down in the industrial side of the market, are those companies that are bucking the trend with earnings going up. We want to examine those and find out what our panellists think.
Starting with James. Aristocrat, buy, hold, sell?
Jeremy Hook: Okay. Jelena, can the earnings growth catch up with that price now?
Jelena Stevanovic: Look, I think it's a buy. It's a buy for me at this level. The multiple is not stretched, still. The land based business has a strong track record growing share and earnings. The digital business does need to be repositioned, so the earnings growth there might be patchy but the opportunity is still large.
Jeremy Hook: Okay. Now one that's been a phenomenon. Everybody knows it, it's one of the biggest now. CSL hit $250. Buy, hold, sell?
Jelena Stevanovic: Hold at these levels. Only in valuation, but it is a great business. Outstanding health franchise. The lowest cost producer in the market, the only one that's been investing into growing its capacity so that can actually service the growing market. A great franchise but hold at this multiple.
Jeremy Hook: The market loves earnings growth but sometimes can pay too much, James. CSL, buy, hold, sell?
James Miller : CSL is a buy, and the reason is it takes five years to build out a whole blood plasma collection centre. CSL is building three times as many as anyone else and the market's already tight. So despite the valuation multiple, we see a pretty good runway of growth.
Jeremy Hook: Okay. Fisher & Paykel Healthcare have probably surprised a lot of people. What do you think now, buy. hold, sell?
James Miller : It's a hold for us. The reason being on that stock is that it's more skewed towards sleep apnea masks rather than the generators. And we think in the US of the next few years there could be some pricing pressure on masks, which is around 85% of their revenue in that division.
Jeremy Hook: Jelena, do you share concerns about FPH? Buy, hold, sell?
Jelena Stevanovic : A hold for me as well. Another great health franchise, the company has a true differentiated proposition in the hospital segment. I do agree with the risks in the RSA part of the business. The hold is purely on valuation, again has traded through its long-term PE range. So great franchise, but a hold.
Jeremy Hook: What about a special of yours where there's either very good earnings growth in a lacklustre market for earnings or a real surprise the market doesn't know about?
Jelena Stevanovic : Oh, look, I like Goodman Group. It's an industrial real estate company, invests in locations the company identifies as cores are being highly urbanised, exposed to strong e-commerce strengths and in high barriers to entry markets where land availability is poor. All those trends will support earnings profile of that company for a long time. It has a highly incentivised workforce through a share-based remuneration scheme that aligns interests of shareholders with the entire workforce. And unlike most companies in that space, it's a capital-light model because most of the development activity happens not on their own balance sheet, but within the partnership structure.
The only risk in the short term to call out is that the chunk of the portfolio sits in the Hong Kong geography and given recent political risks that may be a little bit of a problem.
Jeremy Hook: Goodman Group. Thanks for that, Jelena. What about you James, what's the team and yourself found out that there as a really good earnings growth story?
James Miller : Downer is a business that's very well positioned. It's a company that develops and then operates urban infrastructure. It's trading on a multiple below the market multiple, and as earnings growth, above the market earnings growth. Not only that, if there is any fiscal stimulus directed towards infrastructure then they're going to be a key beneficiary of that. So cheap valuation, earnings upside. It's a buy for us.
Jeremy Hook: Excellent. Share prices will always in the long-term follow earnings growth. Keep your eye out for Goodman Group and Downer.