This week I spoke with Charlie Aitken to discuss some of the earnings results and what is going on with the market.
Charlie, like me, is not a doomsayer and is feeling pretty confident about the outlook, particularly given the banks’ strong lead. Commonwealth Bank’s record half-year profit announcement of $4.27 billion was up 14% on the same time last year, and should calm any concerns about the banks.
Charlie, last week you called the volatility a “text book” trading correction. So what’s been going on?
Thankfully it has played out that it was just a basic trading correction. I think I said last week the bank results would see the market do better and that’s pretty much what’s happened. The reporting season has got better as it has gone on, highlighted by the CBA record profit yesterday – CBA lifted the interim dividend 12% to 183c fully franked. And the day before that, there was the record ANZ result.
There have been other good results from companies like Boral. Its underlying profit for the half-year rose 73% to $90.4 million.
Early on there were plenty of analysts saying that earnings wouldn’t support current valuations. So is this going to be a better reporting season than most pundits expected?
The earnings season always starts with the worst results. It’s getting into the more high quality companies now. I think the reporting season is going to be a way of making money in this market.
What are some of the companies you like?
Well BHP – I’m hoping there is some sort of capital management surprise there. I like resource stocks that have potential to be shareholder friendly, like BHP and Rio. Costs have come down for the miners and their margins are now good. Remember BHP is sitting on a bucket load of franking credits.
I think the facts show they have passed the test and now the bigger companies are leading the market.
And what do you think about Telstra?
Yesterday I had my fingers and toes crossed that they would increase their interim dividend.
I thought they could be able to lift the interim dividend 1c to 15c and they lifted it half a cent to 14.5c. But the fact that Telstra has lifted the interim dividend is a big moment. It’s Telstra’s first dividend lift since 2005 – another positive sentiment event for a big cap stock.
The result is good – net profit after tax up 9.7%. I still think Telstra is headed to $6.00.
So the pundits got it wrong?
I think that negative view is proving broadly wrong – I think the results are more than justifying the valuations.
Companies like Boral rallied 9% after they announced and even Dominos, another company that people said was too expensive, that went up 13%.
So why do you think there were so many pessimists around reporting season?
I think people have still got post GFC-itis. They think everything will mean revert. When the world economy and the Australia economy are growing, earnings go up and markets, of course with some trading setbacks, go up too.
So it’s all good news from here on in?
Don’t get me wrong, of course there have been some that have lowered their guidance, like Bradken and Treasury Wine Estates. But I think we’re going to see more and more instances of results justifying values. I think the market was too bearish coming into this season, particularly for the big cap stocks.
So what’s your general market view for the year ahead?
Well, we got through Janet Yellen’s recent testimony in the US and the debt ceiling in the US now seems to be a non-event. Emerging markets seem to have stabilised, to me it looks like we’re in for a slightly brighter period. I still think the market can get to 6000, but it won’t be without short-term trading volatility. As I have written and said numerous times, we can’t get there without BHP being re-rated. Hopefully that process starts with capital management surprise at the interim result.
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