We are nearly through the company reporting season and profit results have been slightly lower than expected. An area of exception has been with the mining services sector where we have seen Monadelphous Group Limited (MND) and Bradken Limited (BKN) perform strongly after releasing their results.

The ‘confession season’, which pre-dates the reporting season by a month, had established a very bearish tone with numerous companies softening up the market with profit downgrades. It has been interesting to note that the share prices of these companies that have met these lower expectations have generally rallied strongly.

Profits flat lining

According to analysis of the reporting season by Credit Suisse, 21% of companies have delivered a negative surprise, 16% of companies have delivered a positive surprise and 63% of companies have reported results that have been in line with market expectations. This is the largest percentage of companies delivering negative surprises since the first half of 2009.

On the flip side, the positive stock price reaction from many of the results that beat market expectations represents pure Price to Earnings (PE) expansion. The earnings guidance and outlook statements for full-year 2013 were generally very guarded and cautious.

Equity analysts are still expecting 10% earnings growth for FY2013, while we at Wilson Asset Management are expecting flat earnings. Goldman Sachs has stated that 46% of the companies they cover have had their FY2013 earnings expectations downgraded with just 16% experiencing FY2013 earnings upgrades.

Companies are telling us that they are still facing major macro economic headwinds and we envisage earnings expectations for FY2013 will continue to be revised down further throughout FY2013.

Interest rates and consumer spending

A theme coming from our company visits (we visit 1,000+ company a year), is that they have not seen any positive impact from the last series of interest rate cuts. Consumers remain firmly on the sidelines in terms of spending, with low levels of confidence in the current economic environment.

In particular, the retailers are saying that while they saw a small bounce in spending from the government assistance cheques that went out to households over May, June and July, the affect of this has now tapered off and trading conditions have reverted back to the tough conditions experienced before the cheques were distributed. They also expect these tough trading conditions to persist throughout FY2013.

We still believe the Reserve Bank will cut interest rates again in FY2013 in order to address the stagnating economy outside of the mining and resource sector, which itself seems to be coming off the boil. Two clear examples are BHP Billiton’s (BHP) downsizing of the Olympic Dam expansion project and the Port Hedland outer harbour expansion.

Stocks with value

The majority of the positive earnings this reporting season have been mainly through reducing costs and operational efficiency rather than through top-line revenue growth. This is a trend that can only last for a finite period of time and eventually companies need to grow their revenue to achieve sustainable earnings growth.

I look to invest in companies that are growing strongly, despite the prevailing economic environment, and are reasonably priced. Examples of such companies include Flexigroup Limited (FXL) and Breville Group Limited (BRG), both of which I have written about previously (Click here to read). Others would include McMillan Shakespeare Limited (MMS) and Skilled Group Limited (SKE).

Important information: 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. Anyone should consider the appropriateness of the information in regards to their circumstances.