After its stellar 2019 – which saw an 18.4% gain for the benchmark S&P/ASX 200, and a 23% return with dividends included – and the early strength in January, which pushed the index 5% higher for the month, it’s crunch time for the Australian share market, as the December 2019 reporting season kicks into gear.
Most companies are reporting half-year results, but there is a substantial contingent reporting full-year results, if they use the calendar year as their financial year.
The problem for investors is that they cannot expect the market to keep rising if earnings don’t match the expectations that are built-in to the share market in terms of price/earnings (P/E) valuations.
The S&P/ASX 200’s prospective P/E ratio – with the ‘E’ coming from analysts’ consensus expectations for earnings over the next 12 months – rose from 15 times to 18 times in 2019, and now standing at about 18.2 times earnings.
Broker Goldman Sachs says that this expansion in the P/E provided about 90% of the share market’s rise in 2019.
The share market has been writing cheques that its member companies’ earnings may not be able to cash; the earnings growth they actually deliver may not match the expectations. And in that case, share prices will fall.
Last year, market (S&P/ASX 200) earnings barely rose, up about 1.5% across the board, but profits would have fallen without the resources companies, which boosted earnings by about 13% on average, buoyed by higher commodity prices and lower costs. The rest of the market saw profits down by about 2%, according to AMP Capital.
Worse, only 36% of companies surprised on the upside in their FY19 profit results, which was the worst result since 2012, on AMP Capital’s figures. More companies (37%) surprised on the downside.
Just 59% of companies reported an increase in profit, down from 77% in the August 2018 reporting season. Almost one-third (29%) of companies cut their dividend, the highest proportion for at least seven years.
The prospects for the coming full-year reporting season, in August, are not viewed optimistically, either. According to Goldman Sachs, the market expects overall profit growth of just 2.5%, with resources companies’ again leading the way, with earnings per share (EPS) up 9% – but down from 19% a year ago.
Fellow broker Citi is a bit more optimistic, looking for 4.9% earnings growth in FY20, falling to 2.8% in FY21; while Morgan Stanley projects earnings growth of 3.8% this year, followed by 4.2% in FY21. These forecasts are very much a moveable feast.
At this point, the resources sector appears to be capable of doing the heavy lifting again – particularly the iron ore miners – going on the recent round of production updates. But this factor depends largely on continued robustness in the Chinese economy: now, thanks to coronavirus, investors have extra reason to be concerned
I wrote last week of the nervousness that has seen some gut-wrenching price drops for companies that downgrade their profit expectations. As the earnings season gets under way, that still applies; but the flipside to that is that examples of genuine earnings growth will be rewarded.
Companies exposed to the domestic economy are at particular risk heading into the reporting season – particularly consumer discretionary stocks and companies linked to housing activity.
In the week to come, we see a couple of full-year results – engineering and construction group CIMIC (the former Leightons), which has already come out with a shock downgrade – and real estate investment trust (REIT) GPT. Of the half-year reporters up this week, Mirvac and REA Group (which runs the realestate.com.au website, as well as real estate websites in Europe, Asia and the US) will tell us a bit about the health of the housing sector; while retail star JB Hi-Fi will show a window into the health of the Australian consumer, as will REIT Shopping Centres Australasia.
Tuesday
- CIMIC (CIM) Full-year
- Janus Henderson (JHG) Full-year
- Shopping Centres Australasia Property Group (SCP) Half-year
- BWP Trust (BWP) Half-year
Thursday
- Dexus (DXS) Half-year
- Mirvac (MGR) Half-year
Friday
- REA Group (REA)
- News Corp (NWS)
Monday 10 Feb
- GPT (GPT) Full-year
- Aurizon (AZJ)
- JB Hi-Fi (JBH)
- Carsales.com (CAR)
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