ChartWatch: Fortescue, IGO, Mineral Resources, Resmed & Woolworths vs Broker Consensus

It’s a busy time for investors! With a combination of quarterly reports for many resources companies due by January 31, and the customary confession period ahead of first-half earnings season which kicks off next week, there’s plenty of information for us to sift through. Looking through recent broker research notes, it’s clear there are a few Aussie stocks which have captured the market’s attention over others.

In today’s ChartWatch, I thought I’d mix it up a little and do a technicals versus fundamentals edition. Not in an adversarial way! On the contrary, I want to show how the two analysis methods can work together. I believe there’s great value in having a balanced approach which considers both fundamental and technical factors.

With this in mind, let’s see what the big brokers had to say about several popular Aussie stocks, as well as what my charts say about their price action. Let’s dive in!

Fortescue (ASX: FMG)

Last week Fortescue released its December 2023 Quarterly Production Report.

BROKERS

• Bell Potter

  • An “overall positive quarter for FMG” based upon favourable costs and lower pricing discounts for its ore, along with higher prices more generally

  • The main risk is potential seasonal weakness in the March quarter, FMG is “more exposed than usual” this year due to logistical bottlenecks

  • Increases FY24 earnings per share (EPS) forecast by 10%

  • Dividend yield may offer price support

  • Retains SELL rating due to “low growth in global steel demand and deteriorating price environment; Price target increased to $21.51 from $21.39

• Goldman Sachs

  • Considers quarterly performance as “strong”, better than expected

  • Increases FY24 EPS forecast by 6%, but cuts FY25 EPS forecast by 2% due to lower Ironbridge production guidance

  • FMG trades at a “premium” to BHP and RIO

  • Retains SELL rating; Price target increased to $19.80 from $19.30

• Ord Minnett

  • Production was in line with expectations

  • FMG benefitting from steel mills seeking lower cost / lower grade ores as steel margins increasingly under pressure

  • Iron ore prices “will moderate closer to the cost curve”

  • Retains SELL rating; Fair Value $17.30

• UBS

  • Quarter performance as in line with expectations, notes highest realisation of 62% benchmark price since 2019

  • FMG is “not cheap” trading at FY24-FY25 EV/EBITDA of 4.8x-5.6x vs 5 year average of 4.7x

  • Retains SELL rating on “valuation grounds”; Price target increased to $24.60 from $24.40

TECHNICALS

Sell? Who's selling Fortescue?

ST/LT Trends: ⬆️/⬆️

Price action: ⬆️ Peaks / ⬇️ Troughs

Candles: ⬜

Commentary: It’s important to note Market Index doesn’t have access to every broker covering each of the stocks in this article (I have included all the ones we do have access to). So, whilst it appears Fortescue has four retained SELL ratings from four brokers, one can’t assume this is the only view in the market.

Certainly, the unanimous vote of “SELL” displayed above doesn’t explain what I can see on the chart! All I can see is excess demand in the form of well established short and long term uptrends, good price action, and plenty of demand-side candles. After clearing $28.48, FMG is again plumbing all-time highs. There’s nothing major in the technicals to suggest the prevailing trends can’t continue.

IGO (ASX: IGO)

On Monday IGO issued a Lithium Business Update

BROKERS

• Bell Potter

  • IGO is “highly leveraged” to lithium prices, and its lithium operations “will provide an excellent platform” particularly from FY27

  • Recent lithium slump could see IGO become a takeover target

  • Retains BUY rating due to difference between target price and stock price; Price target cut to $8.50 from $11.30

• Citi

  • Free cash flow (FCF) yield circa 10% is attractive and superior to average of peers

  • Lack of marketing rights is a negative

  • IGO remains “only ASX-exposure to the lowest cost hard rock mine globally”

  • Bulk of EBITDA downgrades are “done for the FY”

  • Upgrades rating to BUY from Neutral on valuation grounds; Price target $8.90

• Macquarie

  • Lower production and higher costs at Greenbushes results in a cut in FY24 EPS forecast by 9%, deferring sales until FY25 increases that year’s EPS forecast by 7%

  • Retains OUTPERFORM rating; Price target cut to $9.90 from $10

• Morgan Stanley

  • Retains EQUALWEIGHT rating; Price target $8.85

• UBS

  • Update was “largely in line with expectations”

  • Notes 205 kt inventory build, 100kt lower mine output, will do little to alleviate oversupply in lithium market given rest of sector, still sees 330 kt oversupply in 2024, “a way to go before it balances”

  • Retains BUY rating; Price target cut to $9.50 from $10.50

TECHNICALS

IGO is caught between a hard-rock and a hard place

ST/LT Trends: ⬇️/⬇️

Price Action: 📉

Candles: ⬛

Commentary: Again, most of the brokers we had access to here are quite positive on IGO, and three out of five of them have been for some time. There’s little in the technical to back this up, with well-established short and long term downtrends, poor price action, and apart from the recent rally from $6.76, predominantly supply-side candles.

The rally from $6.76 is constructive given the appearance of a few downward pointing shadows. These indicate some buy the dip activity has returned. Still, until I see higher peaks and higher troughs (with at least a close above the last peak at $8.15), I remain sceptical that we have yet transitioned into a state of sustainable excess demand. A close below $6.76 would signal excess supply remains the norm.

Mineral Resources (ASX: MIN)

Last week Mineral Resources announced its FY24 Q2 Quarterly Activities Report.

BROKERS

• Bell Potter

  • Production was “generally above forecasts”

  • Cuts spodumene price forecast to US$1,100/t from US$2,500

  • As a result, cuts EPS forecasts by 26% in FY24, 29% in FY29, and 7% in FY26

  • Retains BUY rating; Price target cut to $75 from $90

• Citi

  • Quarterly report was “better than expectations”

  • Lowers earnings estimates on higher iron ore costs

  • Retains BUY rating; Price target cut to $71 from $72

• Goldman Sachs

  • A “mixed” quarterly production result

  • MIN is “fully valued” compared to its peers

  • Lithium price is expected to continue to decline “from 24-25”, to trade “at or below marginal cost” to be “set by Chinese integrated lepidolite producers”

  • Retains SELL rating; Price target cut to $51 from $53

• Morgan Stanley

  • Quarterly production in line – to better than forecast

  • Remains “cautious” about company’s balance sheet, ongoing lithium price “volatility” which increases risks

  • Lower lithium prices results in EPS downgrades

  • Retains EQUALWEIGHT rating; Price target cut to $63 from $66.50

• RBC Capital Markets

  • A “better than expected” quarterly production result

  • Sees improvement in lithium production and sales volumes vs unit cost performance as a “standout”

  • Operationally, Mt Marion and Wodgina have “turned the corner”, to “drive EBITDA margin expansion and growth”

  • Retains OUTPERFORM rating; Price target $75

• UBS

  • Notes stretched balance sheet and “challenged lithium markets to continue”

  • Cuts EPS forecasts by 25% in FY24, 5% in FY25, and 27% in FY26

  • Retains SELL rating; Price target $53

TECHNICALS

Is MinRes an iron ore or lithium stock anyway!?

ST/LT Trends: ⬇️/⬇️

Price Action: ⬅️➡️ (i.e., higher peaks & lower troughs)

Candles: ⬛⬜

Commentary: Generally, a bearish set of ratings from the brokers surveyed for MIN, and this is more commensurate with the chart than the first two stocks we’ve looked at. Certainly, the technicals point to an environment of general excess supply, but I note it is also one which is prone to swinging between equilibrium and excess demand at a whim.

Evidence of this includes wild swings in the price action since December, culminating in a sharp selloff to $52.52 earlier this month. The bounce since then is shaping up to be equally forceful with several demand-side candles prevalent.

I suggest there’s little here for trend followers looking to go long into a nice uptrend, or short into a nice downtrend. MIN looks largely stuck in the middle as investors grapple with its conflicting fundamentals. A close above the long term trend ribbon would be constructive, whereas a close below $52.52 would signal the supply-side has regained control.

Resmed (ASX: RMD)

Last week Resmed announced its Results for the Second Quarter of FY2024.

BROKERS

• Citi

  • EPS was ahead of consensus, on strong demand for devices

  • Suggests data so far shows no major impact on RMD funnel from GLP-1 drugs

  • Upgrades EPS forecasts for FY25 by 3% and FY26 by 1%

  • Retains BUY rating; Price target increased to $34 from $29

• Goldman Sachs

  • EBIT and EPS beat estimates on improvement in gross margins, reversing disappointment in fourth quarter

  • Still sees market share capture from Phillips as major driver for earnings going forward

  • “Sufficient positivity” to continue to see “asymmetric upside” given current valuation despite GLP-1 risks

  • Retains BUY rating; Price target $32

• Morgan Stanley

  • Retains OVERWEIGHT rating; Price target increased to $31.80 from $28.60

• Ord Minnett

  • Notes underlying earnings growth of 15% despite concerns about the impact of GLP-1 drugs

  • Long term estimates are “broadly unchanged"

  • RMD is “materially undervalued" due to “improving patient flow” and increasing availability of product to support sales growth

  • Retains ACCUMULATE rating; Fair value $39

• UBS

  • “Positive GLP-1 funnel effects probably a mid term theme, not a short term one”

  • Modified sales and costs assumptions result in an increase of 7% for FY24 EPS

  • Retains NEUTRAL rating; Price target increased to US$180 (A$27.70) from US$175 ($A26.90)

TECHNICALS

Resmed's chart suggest the bulls have awoken (restfully due to their CPAP devices!)

ST/LT Trends: ⬆️ / ⬆️

Price action: ⬆️ Peaks / ⬆️ Troughs 📈

Candles: ⬜⬛

Commentary: The brokers we’ve surveyed appear to be very positive on RMD, and this is consistent with the technicals. I note a well established short term uptrend, and a long term trend which is transitioning from down to up. On the latter, I suggest given the long term trend ribbon is increasingly demonstrating its offering dynamic support to price – this transition is largely complete.

The price action is very solid, showing strong upward pulses versus only limited pullbacks – signals of buy the dip and accumulation. Candles are somewhat mixed, with the more than occasional supply-side showing – but not enough I feel to derail the short term trend.

$26.86-$27.12 is now the key zone of demand. As long as the RMD price continues to close above this level, I suggest the short term uptrend is intact. I note likely stiff resistance at the historical demand point at $30 – it is common for historical demand points to act as supply points in the future. This perhaps limits the opportunity here on a reward to risk basis. Still, I remain confident that the RMD chart shows solid excess demand.

Woolworths (ASX: WOW)

On 29 January Woolworths announced a F24 HY Results significant items and trading update.

BROKERS

• Citi

  • Update guidance “calls into question the long-term margin prospects for the business”

  • NZ business performance was worse than expected, but Australian businesses “performing fine”

  • Retains BUY rating; Price target cut to $42 from $43

• Goldman Sachs

  • The NZ business will take longer than expected to turnaround, but Australian operations food growth was strong and better than peers

  • Prefers WOW over COL

  • Retains BUY rating; Price target cut to $42.30 from $43.30

• Macquarie

  • Guidance was in line with forecasts, with Australian food and B2B divisions “tracking well”

  • Cuts EPS forecast for FY24-FY26 by 1% respectively

  • Retains NEUTRAL rating; Price target increased to $37

• Morgan Stanley

  • Solid performance by Australian operations offset by NZ weakness

  • Retains UNDERWEIGHT rating; Price target $34.50

• UBS

  • Australian food performance was better than expected, but the outlook is mixed

  • NZ to remain “challenged” due to local economy, “company specific factors”, long turnaround ahead

  • Cuts EPS forecast for FY24 by 6.5% and FY25 by 6.1%

  • Retains BUY rating; Price target cut to $40.50 from $42

TECHNICALS

The Woolworths chart is stuck in the middle, but it could be worse, no really...

ST/LT Trends: ⬇️/⬇️

Price action: 📉

Candles: ⬛

Commentary: A bit of a mixed bag from our surveyed brokers. This indecision as to whether WOW is a dog or darling appears to also be reflected in the techincals.

I note a short and long term downtrend, albeit only newly-established on both. Price action is lower peaks and lower troughs indicating sell the rally activity and distribution. Candles, well, WOW has the clearest-cut candles of all the charts reviewed today – and not in a good way. Predominantly black smacks of programmed sell orders pervasively offloading stock throughout the day and causing closes near the low of each session.

I suggest a close below $35.35 would confirm a state of clear excess supply and cement the short and long term downtrends, while a close above $37.59 would be required to confirm the market has swung back to a state of excess demand.

Carl’s Technical Analysis Methodology Key

TRENDS

ST Trend ribbon: 21 & 34 EMAs || LT Trend ribbon: 144 & 233 EMAs

⬆️ = Uptrend, the ribbon is rising indicating a higher probability the market is in a general state of excess demand

⬇️= Downtrend, the ribbon is declining indicating a higher probability the market is in a general state of excess supply

➡️ = No trend, the ribbon is flattening indicating a higher probability the market is in equilibrium

PRICE ACTION

📈 = Rising peaks and rising troughs indicating buy-the-dip activity and supply removal (i.e., indicating a higher probability market is in a general state of excess demand)

📉 = Falling peaks and falling troughs indicating sell the rally activity and demand removal (i.e., indicating a higher probability market is in a general state of excess supply)

⬅️➡️ = Neither of the above scenarios, market price action is indecisive

CANDLES

⬜ = Predominantly demand-side candles in the recent past, i.e., white bodies and or upward-pointing shadows (i.e., indicating a higher probability market is in a general state of excess demand)

⬛ = Predominantly supply-side candles in the recent past, i.e., black bodies and or downward-pointing shadows (i.e., indicating a higher probability market is in a general state of excess supply)

⬜⬛ = Mixed, i.e., indicating no discernible trend towards demand-side or supply-side candles in the recent past