In the first week of December, Morningstar’s Equity Analysts have updated their research opinions and estimates on 10 major UK companies, including leading banks and natural resource stocks. Morningstar Research is available exclusively to Premium members, but here we share some of the recent highlights:
BG Group (BG.) and BP (BP.)
We've lowered our estimate of the marginal cost of domestic natural gas from $6.50 per thousand cubic feet to $5.40 per mcf, driven primarily by an updated analytical approach. “For those firms most leveraged to gas production, our fair value estimates have decreased 10%-15%,” Morningstar’s Stephen Simko explained in an analyst note on Friday. BG’s fair value estimate has been dropped to 1,400p as a result; BP’s fair value is maintained at 478p per share as “only 11% of BP's 2015 production will derive from North American natural gas.”
Cobham (COB)
Morningstar’s Neal Dihora has updated his investment thesis on the engineer but his outlook for the firm is mixed. “We expect most of Cobham's end markets to see limited growth as multiple countries deal with budget constraints,” her wrote, “However, even this limited growth is compounded by risks of programme delays or outright cancellations,” Dihora added.
Glencore (GLEN) and Xstrata (XTA)
Xstrata announced Tuesday that CFO Trevor Reid, previously slated to assume the same role at the combined Glencore-Xstrata entity, has "decided not to take up the position" upon completion of the merger. It originally had been contemplated that the roles of chairman, CEO and CFO at the combined entity would be filled by current Xstrata leadership: John Bond, Mick Davis and Reid, respectively.
Analyst Daniel Rohr noted that not only does this leave none of the original leadership trio in place, it also means that much of the experience will be going out the door too.
“The combined entity's industrial assets will drive a much larger share of consolidated profits than the trading arm, so it had made a great deal of sense to have experienced industrial management--Xstrata's Davis and Reid--charged with leading the group,” Rohr wrote in his analyst note immediately following the announcement. “Going forward, it will be the Glencore traders, CEO Ivan Glasenberg and CFO Steven Kalmin, running the show,” he added.
HSBC (HSBA)
It came as little surprise when HSBC announced this week that it is selling its 15.6% stake in Chinese insurer Ping An to Thai conglomerate Charoen Pokphand, as rumours had been circulating for weeks.
“We're pleased to see further evidence that this strategy is more than just bluster, as we think a streamlined HSBC will be easier to manage and more profitable,” wrote Morningtar’s Erin Davis in her latest analyst note.
Rio Tinto (RIO)
Rio recently warned of an uncertain and volatile short-term outlook, but also pointed to an expected fourth-quarter pick-up in Chinese fixed-asset investment. The company is balancing value-accretive investment with returns to shareholders—something that Morningstar’s Mark Taylor does not think will necessarily translate to higher dividends. “Cut-backs in expenditure and operating costs should allow the dividend to be sustained, in line with the progressive dividend policy, despite falling commodity prices,” he wrote in Thursday’s analyst note.
Royal Dutch Shell (RDSB)
“A major company-specific issue facing Shell is low North American natural gas prices given the big bets it has placed on dry gas shale plays in recent years,” wrote analyst Stephen Simko. Shell was one of the two major oil producers to jump headfirst into shale has, with the hope of driving production growth. “There's no question this hasn't played out as hoped,” says Simko.
Standard Chartered (STAN)
Charges that Standard Chartered conspired with the Iranian government to launder money through New York resulted in a hefty fine for the bank and a stain on it’s previously stellar reputation. But Erin Davis is thankful on behalf of investors that this discrepancy did not result in the loss of Standard Chartered’s banking licence. “We think management was smart to settle charges quickly and avoid an ugly public hearing, and we think the charges are unlikely to result in devastating damage to the bank's business,” Davis said as she updated her investment thesis this week.
Tesco (TSCO)
Tesco’s weaker like-for-like sales in the UK failed to impact Morningstar’s fair value estimate this week. The retail giant also announced plans to sell its Fresh & Easy segment in the United States in a move welcomed by analyst Michael Keara. “We view the move to exit the US market as a positive and believe capital can be used more prudently in other areas [at Tesco],” Keara wrote in his analyst note.
