Brexit Will Bludgeon Banks yet Could Help Miners: Monday's Analyst Actions
Brexit especially bad news for U.K. banks
In the aftermath of the Brexit vote analysts are souring on European banks, particularly those with a large presence in the U.K.
Joseph Dickerson, analyst at Jefferies Group LLC, cut Royal Bank of Scotland Group PLC to 'hold' from 'buy,' and lowered Barclays PLC to 'underperform' from 'buy'. He also took an ax to his share price target for Lloyds Bank PLC.
"We cut 2016-2018 earnings estimates by 17 percent, 46 percent, and 72 percent for LLOY, RBS, and BARC respectively," writes Dickerson. "The decline in earnings reflects a slow growth scenario in the U.K. characterized by lower loan growth, higher impairments and increase risk-weighted assets density."
The U.K.'s potential exit from the European Union calls into question "the structure, profitability, and, indeed, existence of BARC's investment bank," he asserts.
While the bank's management had a difficult job prior to Brexit, increasing earnings is likely to be even harder now, according to Jefferies.
Meanwhile, Royal Bank of Scotland is "73 percent owned by a government in turmoil," he adds.
Jefferies lowered its price target on RBS to 227p from 370p, and slashed its price target on Barclays to 115p from 287p.
Separately, analysts at Bank of America Merrill Lynch cut Barclays to neutral from buy and reduced RBS to underperform from neutral, cutting their price targets by 21 and 41 percent, respectively.
"U.K. banks are materially better placed today than they were in 2007, writes their Analyst Michael Helsby. "That said, if unemployment increases, house prices fall and corporate insolvencies rise, bad debt will go up."
Goldman sees fewer reasons to dislike miners in the wake of the referendum
European miners are positioned to do well in an environment of perpetually sinking bond yields that push investors instead toward equities with a decent dividend, argue strategists at the Goldman Sachs Group. Moreover, in general, the group's exposure to Europe is small, and revenues denominated in U.S. dollars will have a positive effect on financial performance.
That's part of why analysts led by Eugene King upgraded Rio Tinto PLC to 'neutral' from 'sell,' seeing scope for the miner's dividend to rise in the short-term.
"The main reason for our previous Sell rating was our conviction that the iron ore price would sustain below $40/t, which would have seen a significant negative impact on earnings and cashflow," writes King. "While we do not move away from that conviction in the medium- and long-term, however the recent strength in iron ore prices will see a significant increase in 2016 cashflow – both lowering debt and potentially enabling Rio’s board to deliver more than the minimum 110c FY dividend."
The company's relative lack of exposure to China compared to its peers is also a plus, he wrote.
Goldman's 12-month price target of 1,900p represents 9 percent downside to Rio Tinto's closing price on Friday.
Pound's decline poised to blow hole in Eurotunnel's top line
Groupe Eurotunnel SE, which operates the rail tunnel between the U.K. and France, is "the stock most negatively affected by Brexit in the infrastructure sector," according to analysts at Deutsche Bank AG.
The depreciation of the pound against the euro will have a negative impact on financial results, and freight volumes could come under stress.
"In our view, Brexit opens a period of uncertainty in several aspects affecting Eurotunnel operations, mainly in the traffic of commercial products," writes Analyst Jose-Francisco Ruiz. "We think it will take several quarters until the key elements of the new scenario (commercial agreements, etc.) are clarified."
Deutsche Bank cut its rating to 'hold' from 'buy' and lowered its price target to €10.90 from €13.20.
Market turmoil provides an entry point for this U.S. homebuilder
Homebuilder Lennar Corp.'s second-quarter earnings, released last week, impressed analysts at Raymond James on three fronts.
The firm's ratio of selling, general and administrative expenses to sales — a measure of its profitability — set a new record in the quarter. Home orders grew unexpectedly fast compared to the previous year, and units outside of the main business, like financial services, made a strong contribution to the company's profits, according to Analyst Buck Horne.
The U.S. housing market continues to improve following the financial crisis, but at an underwhelming pace. As household formation among millennials begins to pick up steam, he expects this sector to serve as a major driver of U.S. growth going forward.
"With the recent pullback, we believe an opportunistic entry point has opened to own one of the industry’s best positioned and diversified platforms at a nearly 20 percent discount to its closest large-cap peer (currently D.R. Horton trading at 1.8x adjusted book value)," writes Horne.
Horne upgraded Lennar to 'outperform' from 'market perform', and returned to a 12-month target price of $53. The stock closed at $44.73 on Friday.