\n\tBy Greg Peel<\/p>\n
\n\tThe Australian reporting season has effectively now passed its third week, although typically results begin with a trickle and end with a flood. The season features mostly full-year results for FY10, but increasingly more stocks these days report on a US-style calendar year basis, so those stocks are posting only half-year results. There is a group of stocks which will not report given they run on a different accounting cycle again, such as three of the Big Four banks.<\/p>\n
\n\tBy number of stocks, we are now 17% of the way through the season (as at last Friday). By market capitalisation, we are 29% of the way through. Between now and August 31 will we see the balance.<\/p>\n
\n\tWhen stock analysts were contemplating what FY10 might bring a year ago, consensus had expectation of a flat period as we came out of the GFC with a strong rebound not expected until FY11. In the end, FY10 was actually better than first thought given the impact of government stimulus and the surprising revival in exports to China. This meant analysts were forced to bring some of their rebound expectations forward to FY10, but still FY11 was anticipated as the strong growth year.<\/p>\n
\n\tThis was still mostly the case as we entered calendar year 2010 with a wet sail, but then everything started to go awry. Europe was in trouble, China wanted to slow things down, and gradually US data showed the rapid bounce out of the GFC was really just a honeymoon. Slowly but surely analysts have been reining in their FY11 forecasts, with the timing of the expected recovery being pushed further out towards late FY11 or FY12.<\/p>\n
\n\tFurther downgrades came about in the traditional “confession session”, in which companies provide updates of their earnings expectations ahead of the black-out period which occurs between June 30 and result publications. And the unaudited pre-release of some results in the interim saw further downgrades for the most part.<\/p>\n
\n\tBut it is actual results which ultimately matter – not so much the retrospective FY10 numbers, but what those numbers mean for FY11. And of great importance is FY11 earnings guidance and outlook commentary. In some cases companies do not provide guidance and thus suffer from the assumption that “no news must be bad news”. In a few cases however, such as retail, managements have simply called the outlook too uncertain to justify any specific guidance. Analysts have found it hard to argue.<\/p>\n
\n\tBy aggregating the individual stock earnings forecasts from the ten brokers and researchers in the FNArena database, FNArena measures consensus net expectations for (circa) 1% earnings growth in FY10 and 20% in FY11.<\/p>\n
\n\tWith only 29% of the market cap reporting to date, Macquarie has reduced its earlier second half FY10 growth forecast of 12.1% by 2.9 percentage points, meaning the analysts' full-year forecast has dropped from 2.0% to 1.1%. Macquarie notes 33 companies have delivered nine positive earnings surprises and eight negative surprises, so clearly the negatives have been more substantial than the positives.<\/p>\n
\n\tThe good news is that positive dividend surprises have been more prevalent than earnings surprises.<\/p>\n
\n\tBut with weak FY10 results has come weak FY11 guidance in many cases. Those stocks providing weak guidance to date (weak meaning below analysts expectations) include Telstra ((TLS)), Commonwealth Bank ((CBA)), Computershare ((CPU)), QBE Insurance ((QBE)) and Insurance Australia Group ((IAG)). Weak guidance has also come from quarterly updates for National Bank ((NAB)) and James Hardie ((JHX)).<\/p>\n
\n\tBut there has also been some better than FY11 expected guidance from companies such as Coca-Cola Amatil ((CCL)), Rio Tinto ((RIO)), Santos ((STO)), Cochlear ((COH)) and Navitas ((NVT)) and also a positive sales outlook from Myer ((MYR)).<\/p>\n
\n\tLet's think about those companies. Banks are obviously bellwethers of general domestic economic health, and once ambitious FY11 expectations have now been tempered. A weaker stock market in the June quarter has impacted on Computershare, and also on the investment returns for insurance companies at a time when disaster claims have again been significant. Telstra has just taken too long to catch up to the twenty-first century, while a weak outlook from James Hardie simply suggests expectations of a US housing revival have been optimistic at best.<\/p>\n
\n\tOn the other side of the coin, Rio has benefited from higher than expected iron ore prices – thank you China – the Santos result is largely irrelevant given Gladstone LNG is all that matters, Cochlear successfully launched a new product in the period and Navitas is a pioneer in the education field. That leaves Coke and Myer to provide an indication that perhaps the Australian consumer is not quite as bad off as assumed.<\/p>\n
\n\tSimply contrasting weak banks and a strong Myer, and we can see why the latest confidence surveys had business looking weak but consumers looking strong.<\/p>\n
\n\tGoldman Sachs has concluded, from results and outlooks so far, that comments on the domestic economy have been “generally positive”. The consumer discretionary sector nevertheless expects a weak September quarter. But where caution specifically comes in is in global outlooks. Demand outside Australia is softening, and exports have to deal with a stronger Aussie dollar.<\/p>\n
\n\tGoldmans suggests the currency impact on the local market over FY10 has been negative 15%. Those companies with 40% or more of their earnings derived offshore, and yet to report, are Aristocrat ((ALL)), Billabong ((BBG)), Caltex ((CTX)), Sonic Healthcare ((SHL)), CSL ((CSL)), Amcor ((AMC)), Nufarm ((NUF)), Sims Group ((SGM)), Lend Lease ((LLC)) and Westfield ((WDC)).<\/p>\n
\n\tGoldmans believes the Australian consumer will continue to remain resilient in FY11, and that business investment will be strong. On that basis, the analysts' preferred stocks for FY11 are Qantas ((QAN)), Myer, Wesfarmers ((WES)), Ten Network ((TEN)), Bradken ((BKN)) and Orica ((ORI)).<\/p>\n
\n\tGiven the trends seen in results to date, being softening offshore demand and currency headwinds, Goldmans believes there are FY11 earnings risks for Aristocrat, Billabong, Boral ((BLD)), CSL, Foster's ((FGL)) and Sonic.<\/p>\n
\n\tWeak FY11 guidance has been the feature of the season to date, as far as UBS is concerned. UBS analysts have been forced to downgrade their FY11 earnings expectations by a net 2.5% for those stocks having already reported.<\/p>\n
\n\tThe Citi analysts have been arguably the most optimistic about FY10 earnings. FNArena's consensus earnings growth estimate as noted above is 1.0%, but Citi is still forecasting 8.5% despite noting the skew towards negative surprise so far. Citi is part of that consensus forecast, but is clearly an outlier. Macquarie's previous 2% forecast has now been downgraded to 1.1% with the bulk of results yet to come. Citi is nevertheless forecasting 21.5% growth in FY11 which is closer to consensus of 20%.<\/p>\n
\n\tDeutsche Bank agrees that results so far have been “a little soft”, to the tune of 2-3% below expectation on average, but is still happy to warn later results may be different. But what Deutsche thinks is most significant is the fact the market has already priced in a lot of weakness.<\/p>\n
\n\tIn short, the stock market has taken somewhat of a tumble from April to now. In April the market was pricing in solid FY11 growth expectations, to the point where valuations began to look expensive. Those growth expectations are now being lowered as a result of FY10 reports and FY11 guidance, but stock valuations are also lower. To that end Deutsche suggests “markets are priced for somewhat more earnings weakness than has currently manifested in results”.<\/p>\n
\n\tIt is clear that while government stimulus has contributed to underlying economic strength in the June quarter, most of that stimulus has been fed to smaller, unlisted companies (eg schools program contractors). Spending from the listed private sector has been weak. But Deutsche's economists see private spending recovering in FY11, leading to strong earnings growth (a belief backed by consensus forecasts of 20%).<\/p>\n
\n\tConcerns at present seem to be more near-term than longer-term, Deutsche suggests. Thus the analysts suggests the market could respond quite positively to the first signs of growth. It is likely this will first be manifested in the household sectors given the disparity between consumer and business confidence at present. And jobs growth is ongoing.<\/p>\n
\n\t[Note that while Australia's unemployment rate blew out from 5.1% to 5.3% in July, jobs were actually added. The rate change was representative of an increase in the participation rate, meaning more workers now actively seeking employment than previously.]<\/p>\n
\n\tConsumer companies will also now begin to mark sales growth off the trough periods which began once government stimulus had run its course, Deutsche notes. Recently comparisons have been marked to stimulus-fuelled periods which made it hard to look good. Some better comparisons should provide a fillip for the market.<\/p>\n
\n\tAnd Deutsche notes that despite this apparent disparity between the outlook for household sector stocks and other cyclical sectors, valuations are currently about the same. The analysts thus recommend investors look to weight towards household sectors such as retailing and gaming, and parts of media and transport, ahead of a more general recovery down the track.<\/p>\n
\n\tFor more insights see also "Rudi's View: Lessons Learned And Observations To Remember", originally published on the FNArena website on 11 August 2010. Plus FNArena is currently preparing a detailed update on the Australian reporting season which will be published on the website later today.<\/p>\n","protected":false},"excerpt":{"rendered":"
Less than one fifth of Australian companies have reported to date but the early signs are relatively disappointing, brokers have decided.<\/p>\n","protected":false},"author":8,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[6],"tags":[],"acf":[],"_links":{"self":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/57059"}],"collection":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/users\/8"}],"replies":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/comments?post=57059"}],"version-history":[{"count":0,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/57059\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/media?parent=57059"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/categories?post=57059"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/tags?post=57059"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}