Bell Potter just downgraded price targets for 7 stocks, but this isn’t an inflation story

While we’ve experienced a largely positive half year reporting season, for some brokers, it’s meant a revisit of targets and ratings and time for downgrades. In the case of Bell Potter, this meant a revision of price targets for 10 companies including seven target downgrades and 3 target upgrades in its Monday report.

But should investors be worried?

Not necessarily. In the case of all the companies that Bell Potter has downgraded price targets, it has maintained BUY ratings on all of them and remains positive on long-term outlooks. In fact, for the companies it upgraded, only one had a BUY rating while the other two were rated as HOLD.

The companies also ranged across sectors and industries with the rationale for downgrade ranging across companies. While inflation might be affecting costs for some, it wasn’t a universal story. Even for those where inflation might be said to be playing a role, it wasn’t to the extent where you might be worried about the company’s overall prospects.

The magnificent seven – still a BUY, just lowered price targets

The seven companies Bell Potter revised its price targets downwards for were from mining, energy, healthcare, consumer staples and financials. They included Allkem (ASX: AKE), Capitol Health (ASX: CAJ), Cobram Estate Olives (ASX: CBO), Gold Road Resources (ASX: GOR), Medical Developments International (ASX: MVP), Paladin Energy (ASX: PDN) and Perpetual (ASX: PPT).

The revised price targets and rationale for each follows.

• Allkem target price revised to $18.61 (previously $19.36). This was on the basis of downgraded production numbers for Mt Cattlin and the deferral of production from James Bay to late 2024 which will affect earnings numbers for 2023.

• Capitol Health target price revised to $0.33 (previously $0.36). This was due to increased operating expenses and higher depreciation and amortisation charges for the acquisition of Future Medical Imaging Group (FMIG). Capitol Health is also expected to have higher maintenance and growth in capital expenditure across 2023.

• Cobram Estate Olives price target revised to $1.75 (previously $2.00). While Cobram Estate still expects a larger crop this year, a number of its competitors have downgraded their crop expectations so Bell Potter has also adjusted its view. Bell Potter also notes that the company has implemented 10% price increases and a supplier for one of its brands downgraded its oil production.

• Gold Road Resources target price revised to $1.90 (previously $1.95). This was a result of updated valuations of Gold Road’s listed investments, including Gruyere Gold Mine.

• Medical Developments International target price revised to $2.20 (previously $2.25). This was on the basis of higher operating expenses including higher marketing and employee expenditure. Bell Potter also noted it factored a conservative approach to the macro environment within its valuations.

• Paladin Energy target price revised to $0.99 (previously $1.05). This was an adjustment as a result of the Langer Heinrich Project deferring the restart of production to March 2024 along with a reduction in the outlook for uranium contract premiums over spot prices in the near term.

• Perpetual target price revised to $30.50 (previously $30.94). Bell Potter remains positive on the future for Perpetual following its acquisition of Pendal Group. But its forecast for earnings was reduced as a result of higher operating costs, the transaction costs for Pendal, along with increases in debt levels post the Pendal acquisition.

Better prospects spell higher price targets for these companies

Bell Potter retains HOLD ratings on two companies which saw an upward revision of price targets.

• Infomedia (ASX: IFM) target price revised to $1.35 (previously $1.25). This was due to an improved pipeline and cost control.

• Polynovo (ASX: PNV) target price $2.55 (previously $2.30). This was due to an upgrade in earnings and a marginal reduction in operating expense expectations going forward.

It’s worth noting that there was one company that Bell Potter has a rating of BUY on that received an upgrade to its price targets.

IPG Group (ASX:IPG) now has a price target of $2.55 (previously $2.30).

IPG Group services the electrical industry through power distribution, power monitoring, industrial control, renewables, test and measurement and a range of services such as commercial and leisure facilities. Bell Potter believes electrification demand is approaching an inflexion point which will benefit IPG Group across several of the categories it operates in, including EV chargers.

Key takeouts for investors?

The reporting season may have resulted in some changes to expectations in the shorter term but not necessarily to longer term prospects. The fact that even mining companies - generally strong performers in the last year - have had some downward revision is testament to the view that 2023 may be tougher but these companies are set up for success in coming years regardless.