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Earnings season continues – CBA and Wesfarmers to report

Posted By James Dunn On In Shares | No Comments

This week sees earnings season developing critical mass with a flurry of major companies reporting, including the market’s biggest stock, Commonwealth Bank, which reveals half-year results on Wednesday.

Also reporting this week are heavyweights ANZ Banking Group (ANZ), Wesfarmers (WES), CSL (CSL), Santos (STO), Boral (BLD), Dexus Property Group (DXS), Origin Energy (ORG), Vicinity Centres (VCX), South32 (S32), Treasury Wine Estates (TWE) and Sydney Airport (SYD).

Commonwealth Bank (CBA) will be the focus of all eyes on Wednesday, after National Australia Bank’s first-quarter trading update earlier in the month set a tepid tone for the major banks, with the days of double-digit growth a memory. NAB’s revenue increased by 1% but that was more than offset by a 5% rise in expenses – on the back of a new wage agreement and redundancy charges – resulting in a 1% fall in cash earnings. The market did like the fall in bad and doubtful debts, and the stabilisation of interest margins, and will be keen to see more of the same from CBA.

Analysts expect CBA to report half-year cash profit (excluding one-off items) growth of about 1% to $4.84 billion – enough for a record interim profit – and maintain its interim dividend at $1.98 a share. Cost control will be a big theme: CBA’s expenses grew by 4.4% in FY16, and analysts will want to see that brought under control. Anything higher than 3% on the cost growth front won’t impress.

Analysts are also looking for CBA to stabilise its return on equity (ROE) figure, which – while still the highest of the big four – came down from 18.7% in 2014 to 16.5% last year.

Some analysts believe CBA can deliver a small rise in interim dividend, to $2 a share.

According to FNArena’s collation, analysts expect a full-year dividend of 421.6 cents from CBA, up 1.6 cents, which at the current price of $82.90, equates to a fully-franked dividend yield of 5.1%. But the analysts’ consensus target price for CBA, at $79.09, implies that the stock is more than fully valued for the present.

Also reporting interim results on Wednesday is Wesfarmers (WES), which will be an intriguing result because of the company’s coal operations, which should turn from being lead in the company’s saddlebags to a profit contributor. Wesfarmers’ coal division produces 8.5 million tonnes a year of coking coal for the export markets and 3 million tonnes a year of thermal coal for the domestic market. Last financial year, the coal business lost $310 million, contributing to an 80% slump in Wesfarmers’ total profit, but this year it will make money.

In January, Wesfarmers told the market it expected the coal division to earn between  $135 million and $140 million before interest and tax for the December half, compared with earlier guidance of “broadly breakeven” performance.

However, in recent years the market has focused almost wholly on Wesfarmers as a retailer, given that its retail operations generate more than 90% of earnings, and there the picture is unlikely to be positive. The market is bracing for Wesfarmers’ Coles to be beaten on like-for-like (same-store, that is, with store openings and closings stripped out) sales growth by arch-rival Woolworths in the December quarter for the first time in 30 quarters, or more than seven years.

Coles’ first quarter same-store sales growth was 1.7% and analysts expect the second-quarter figure to be even lower, implying that Coles’ FY17 earnings are unlikely to beat those of FY16. Bunnings and Kmart are tipped to improve earnings, but the market expects a loss from Wesfarmers’ problem child, Target. The market will also hope for good news from the newly established UK home improvement business. But the mixed retail bag will overshadow any joy from coal.

Wesfarmers is also one of the Australian market’s yield kings – analysts expect a fully-franked yield of 5.2% in the current financial year – but similarly to CBA, their consensus target price of $41.41 is below the stock’s current price, at $41.76.

Telecommunications giant Telstra (TLS) reports interim results on Thursday, and while analysts don’t expect a significant rise from the earnings per share (EPS) of 17.2 cents a share reported this time last year – the analysts’ consensus expectation, according to Bloomberg, is for 16.7 cents – some lift on the 15.5 cents fully-franked interim dividend would be very welcome. The Telstra result will be parsed for updates on the NBN and its impact on operations.

Like CBA and Wesfarmers, there is little joy for Telstra shareholders in terms of analysts’ consensus target price. At $5.02, according to FNArena, it points to a fall from the current price, at $5.18. But the consensus forecast FY17 dividend yield of 6.1% – seen rising to 6.2% in FY18 – is likely to keep yield-oriented investors on board.

Global hearing-implant maker Cochlear (COH) reports interim results on Tuesday, and the market will want to see that the company’s guidance for a full-year profit lift of up to 20% is on track. The problem with Cochlear is that it is priced on analysts’ consensus at 35 times expected FY17 earnings, so it can’t afford to fall short of market expectation, or the share price will be punished. At a share price of $133.36, Cochlear is trading well above FN Arena’s analysts’ consensus target price of $123.73.

The market’s biotech leader CSL (CSL) follows with interim results on Wednesday. CSL surged in January when it upgraded its profit guidance: the company expects first-half profit of about $US800 million ($A1.1 billion), compared to $US719 million for the same period last year, and says it expects net profit for the year to June 30 to grow by between 18% and 20% on a constant-currency basis. That was a significant upgrade to its previous full-year profit guidance of 11% growth.

CSL is one stock where the analysts’ consensus target price is above the current price – but at $116.55 to $114.50, not by an alluring margin.

Fast-food star Domino’s Pizza (DMP) also reports interim results on Wednesday, and Bloomberg has consensus EPS expectation at 66 cents, versus 52.4 cents a year ago. At $60.50, Domino’s trades on an even more eye-watering price/earnings (P/E) ratio than Cochlear, at 43.1 times expected FY17 earnings. Needless to say, it can’t afford to fall short of expectations. Analysts are backing that it will not: their consensus target price for Domino’s, at $79.18, projects upside of more than 30%.

Sydney Airport (SYD) reports full-year earnings on Thursday. Traffic numbers have been consistently strong for Sydney Airport so the market is expecting a strong result. FNArena has analysts expecting a 35% rise in EPS to 17.2 cents, with a 21.6% lift in the full-year dividend, to 31 cents. That places SYD on an unfranked yield of 5%. FNArena says analysts have a consensus price target on the stock of $6.70, or 8.1% above the current price of $6.20.

Oil and gas major Santos also reports full-year earnings on Friday. FNArena’s collation has analysts expecting earnings per share of 2.4 US cents compared to a loss of $US2.34 a share this time a year ago, but a fall in the dividend from 20 US cents in FY15 to 0.1 US cents. However, STO is seen as having significant upside, with the analysts’ consensus price target of $4.61 sitting nicely above the current share price of $3.98.

Other companies reporting this week include:

Tuesday

Wednesday

Thursday

Friday

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