Earnings season preview – Rio, News and Cochlear

Financial journalist
Print This Post A A A

With no shortage of concerns pre-occupying the share market at the moment – Argentina’s default, the possibility of another European bank crisis and geo-political concerns in the Middle East and Eastern Europe, and weakening iron ore prices on the back of slower Chinese growth – attention moves this week to the real nuts-and-bolts of equity investing: company results.

According to AMP Capital, consensus earnings estimates expect the market to show about 12% average profit growth for the 2013-14 financial year, led by resources (+28%,), banks (+10%) and industrial stocks up 3%.

AMP Capital says the combination of the lower iron ore price, the higher $A and the hit to confidence from the Budget in the June quarter, suggest a bit of downside risk to consensus estimates for resource and industrial stocks, although the banks are likely to remain strong.

The big guns

Heavyweights reporting this week include Rio Tinto (half-year results), News Corporation and Cochlear. Cochlear will lead off on Tuesday with a likely 23% fall in profit, while Rio Tinto is expected to report on Thursday a 25% lift in half-year profit, to about US$5.3 billion. Also on Thursday, News Corp is expected to deliver a 4% decline in revenue and a 42% fall in earnings per share (EPS) for the year, in the first full-year result since the publishing business was separated from its entertainment sibling, 21st Century Fox, in June 2013.

Rio Tinto is one of the stocks that Deutsche Bank has foreshadowed as positive earnings news for the market, along with BHP Billiton (full-year), Commonwealth Bank (the only one of the four majors with a June 30 balance date), Aurizon, Echo Entertainment, Federation Centres, IAG, James Hardie, Orora, Seek, Suncorp and WorleyParsons.

Deutsche suggested before the season that Amcor, Arrium, Computershare and Resmed could disappoint with bad news: sleep disorder and respiratory equipment maker Resmed reported on Friday a 12% boost to full-year profit to $US345.3 million ($A373.6million), but US sales were weaker than expected, sliding 7% in the fourth quarter (See Shortlisted).

Patersons Securities is expecting bad news from the likes of Newcrest, Cabcharge, Toll Holdings, Ten Network, Orica, Fairfax Media, Leighton Holdings and AMP, but says companies that might surprise on the upside include Crown Resorts, UGL, InvoCare, CSL, JB Hi-Fi and McMillan Shakespeare.

Health check

The earnings season is hugely important to the health of the market. The Australian share market’s recent form has been outstanding, with a six-year high recorded in July. But this rise has come largely from expanding price/earnings (P/E) ratios, as investors place their faith in earnings growth coming through to justify the valuations. Recently, it has not done so.

While earnings-per-share growth has averaged around 7.6% a year over the past decade, the past four financial years have seen growth average minus 2%.

According to fund manager Schroders, much of the earnings growth that Australian companies have been able to show has come from acquisition activity, share buy-backs and re-leveraging activity, stimulated by the low-interest-rate environment. Top-line (revenue) and actual organic earnings growth has been difficult to generate.

Six months ago, in the February-March 2014 interim-results reporting season, profit growth across the market averaged about 12%, a stronger-than-expected performance from corporate Australia. But just four sectors – materials (the miners), banks, healthcare and consumer discretionary – delivered virtually all of the total growth in interim profits, and 80% of the increase in dividends.

After the interim season, analysts expected the market to show about 14% average profit growth in FY14, led by about 35% growth in resources companies’ earnings and about 8% growth for the rest of the market.

As the market heads into the FY14 full-year season, that expectation has come down, by one to two percentage points.

At 15 times earnings, the market is not priced such that any bad news can be ignored – any company that fails to meet or beat its earnings guidance will be hammered, and rightly so. Investors have a right to expect that they have been alerted to all of the foreseeable bad news.

The current financial year looks to be much tougher for earnings. Consensus 2014-15 earnings growth estimates are running at about 5%. So another thing that investors will be very interested in this reporting season will be the outlook statements – particularly from the companies in the non-resources sector of the economy, which are supposed to pick up the slack from declining resources investment as the driver of the economy. Companies exposed to the housing industry and retailing will be particularly closely scrutinised for a long-awaited optimism.

Switzer Super Report will be giving readers a heads-up on expected results during the season, using the consensus earnings estimates of analysts. Here is a round-up of the expected forecast FY14 results this week.

Tuesday

Cochlear COH

Consensus earnings per share (EPS): 179.1 cents, –23.1%
Consensus dividend per share (DPS): 254 cents, +0.8%

Colorpak (CKL)

Consensus earnings per share (EPS): 6.7 cents, –27.1%
Consensus dividend per share (DPS): 2.8 cents, +60%

Downer EDI (DOW)

Consensus earnings per share (EPS): 48.5 cents, +6.2%
Consensus dividend per share (DPS): 23.6 cents, +12.5%

Northern Star Resources (NST)

Consensus earnings per share (EPS): 4.8 cents, –28.4%
Consensus dividend per share (DPS): 2.1 cents, –40%

Transurban (TCL)

Consensus earnings per share (EPS): 12.2 cents, +4.3%
Consensus dividend per share (DPS): 35 cents, +12.8%

Wednesday

Credit Corp (CCP)

Consensus earnings per share (EPS): 77 cents, +10.3%
Consensus dividend per share (DPS): 40 cents, +8.1%

Thursday

ALE Property Group (LEP)

Consensus earnings per share (EPS): 15.1 cents, +83.3%
Consensus dividend per share (DPS): 16.7 cents, +4.4%

Aurora Oil & Gas (AUT)

Consensus earnings per share (EPS): US40.5 cents, +58.6%
Consensus dividend per share (DPS): nil

BWP Trust (BWP)

Consensus earnings per share (EPS): 15.1 cents, –27.3%
Consensus dividend per share (DPS): 14.8 cents, +4.3%

Flexigroup (FXL)

Consensus earnings per share (EPS): 27.9 cents, +22.0%
Consensus dividend per share (DPS): 16.6 cents, +14.4%

News Corp (NWS)

Expected to report EPS of US46.2 cents, DPS of US2.8 cents

Rio Tinto (RIO) – interim result

Expected to report a 25% rise in first- half underlying profit to about US$5.3 billion

Tabcorp (TAH)

Consensus earnings per share (EPS): 19.4 cents, +12.9%
Consensus dividend per share (DPS): 15.4 cents, –18.9%

Titan Energy Services (TTN)

Consensus earnings per share (EPS): 27.2 cents, +24%
Consensus dividend per share (DPS): 8 cents, +128%

Friday

REA Group (REA)

Consensus earnings per share (EPS): 116.6 cents, +40%
Consensus dividend per share (DPS): 55 cents, +32.5%

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Follow the Switzer Super Report on Twitter

Also in the Switzer Super Report:

Also from this edition