Reporting season winners and losers

Chairman, Wilson Asset Management
Print This Post A A A

Reporting season

Now in its second official week, the annual reporting season is heating up with a large number of companies – including BHP Billiton Limited (ASX: BHP), AMP Limited (ASX: AMP), and Treasury Wine Estates Limited (ASX: TWE) – scheduled to announce results next week. At this early stage in the earnings season, here are some of our expectations for the remaining weeks, including some likely winners and losers and the early themes that have emerged so far.

While the recent US reporting season was positive with more than 70% of companies exceeding analysts’ expectations, overall, we expect the local reporting season to be more subdued. Australia’s economy has slowed since the May Federal Budget, unemployment has reached a 12-year high and consumer sentiment only recovered from its post Budget dip throughout June and July. In our meetings with company executives over the coming weeks, we’ll be taking a keen interest in their view of the economy, current trading conditions and their outlook statements.

Looking for revenue growth

One of the key measures we’ll be continuing to follow closely is revenue growth. Corporate balance sheets are currently in good shape as companies have focused on cutting discretionary expenditure over the last three to four years. However, revenue growth has remained sluggish and will be a critical factor for companies in achieving operational leverage. Since mid-2012, the S&P/ASX All Ordinaries Accumulation Index has risen a remarkable 47.0%. As the current bull market has charged ahead, price to earnings (P/E) ratios have risen significantly. While the market historically trades on an average P/E of approximately 14 to 15 times since 1970, a number of stocks are trading well above this. With P/E ratios expanding significantly over the last two years, this reporting season we will be looking for evidence of earnings growth to justify these elevated P/E ratios.

Winners: Housing stocks

We’re expecting positive results announcements from companies with exposure to Australia’s housing sector. The housing market has experienced strong growth over the last 12 months as a result of historically low interest rates (the cash rate has remained at 2.5% for 13 continuous months), which have markedly improved the availability of debt for consumers. The outlook for the sector remains quite strong as interest rates are expected to stay at current levels for a few more years to come and there continues to be a housing undersupply coupled with a steady increase in the population. Companies with exposure to the housing sector that are yet to report their results include Mirvac Group (ASX: MGR), Stockland (ASX: SGP) and Aveo Group (ASX: AOG).

Losers: IT services stocks

In our view, IT services companies are likely to report poor results as the sector continues to struggle due to companies’ ongoing nervousness about investing in their businesses. Many companies are now turning to offshoring, in particular in the managed services space, given the superior cost advantage. Results will soon be announced by SMS Management & Technology Limited (ASX: SMX), DWS Limited (ASX: DWS) and UXC Limited (ASX: UXC), the latter of which has already provided an update to the market in late July.

No surprises

The market hates nasty surprises. Surprises can arise when expectations of a company’s results are particularly high and they then fail to deliver. At this early stage of the current earnings season, a trend is emerging where companies that investors have high expectations of are suffering sharemarket falls that are more pronounced if they do not meet the expectations of the market. For example, while REA Group (ASX: REA) reported a significant rise in its profit, with high hopes for a stronger result, the company’s share price fell 8% following its results announcement.

Conversely, we expect that where the market has low expectations of a company’s earnings ahead of their profit announcement, their share price will outperform if they meet their guidance. During the interim reporting season earlier in February and March this year, the market generally had a negative view of the market and very low expectations. As a result, even when a company failed to meet their guidance, their share price rallied because their profit figure was not as bad as investors had expected.

Because of the market’s aversion to surprises, we forecast this overreaction trend to continue for the remainder of the reporting season.

Macquarie data shows that to date, 72% of companies that reported earnings figures in line with market expectations, 21% have exceeded the market’s expectations and 7% have not met forecasts. Time will tell if this is reflected come conclusion of the earnings season.

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

View More Articles