Signs of new earning potential

Published in the Herald Sun, August 2014 by Karina Barrymore

Investors have every reason to be nervous as they brace for the results season with a mixed bag of economic, business and consumer issues expected to throw a few spanners in the works.

An expensive Aussie currency, declining commodity prices, a tough Federal Budget and wavering consumer confidence are extra weighty issues in this year’s profit balancing act.

Some of the toughest sectors include retail, mining and media, however cost-cutting within these companies is expected to help support modest profit growth.

Most analysts have already “softened” their expectations for the upcoming announcements and are looking for signs of new earnings potential for the year ahead.

As they sift through the announcements during the coming weeks, their main focus will be on the strength of profit forecasts for 2015.

Shareholders, however, have not moved on so fast and want evidence their investments have been worthwhile, not only through a dividend payout but also an increase in share price.

Immediate market reactions to profit announcements can have a longer-term impact on share prices, according to Patersons Securities.

“Our research shows that 65 per cent of stocks follow the same price trajectory in the two to four months after the initial reaction,’’ Patersons analyst Kien Trinh says.

“This probability significantly increases if prices were weak prior to reporting date.”

So investors will be watching the sharemarket closely, he says, for that gut instinct reaction to profit announcements.

Any unexpected or disappointing results could erode recent share price rises and set a trend for the coming months, he warns.

According to UBS, the market’s average earnings per share this season is expected to be up 13 per cent, or 9 per cent if you strip out resource companies, compared with a year ago.

Industrial companies are expected to show better growth than companies in some other sectors, although not without some disappointments, UBS strategist David Cassidy says.

Industrials are forecast to report growth of about 6 per cent for both earnings per share and dividends per share, Mr Cassidy says.

“Consumer staples are expected to be an area of weakness, with Woolworths the likely bright spot, in our view,” he says. “We see downside risk to Coca Cola Amatil and Treasury Wine Estates with small degree of downside for Wesfarmers.”

Retail companies are also expected to have mixed results: the broker has concerns about Myer while JB Hi Fi should be in line with expectations and Harvey Norman could do better than expected. Media stocks are also on uneven ground, with earnings from traditional advertising down but online players again expected to show stronger growth this year, Mr Cassidy says.

Among the major banks, only the Commonwealth Bank is due to issue a full-year result in the coming weeks, but the finance sector in general is expected to benefit from another record profit at the lender.

While some analysts say bank stocks appear to be fully priced, fund manager Wealth Within expects their share prices will keep rising.

“We still see buoyancy in this sector with money still flowing into the sharemarket and it usually goes to the biggest stocks which are often the banks,’’ Wealth Within analyst Janine Cox says.

“This will also likely have a flow on to others, such as Suncorp and IAG, as prices drift higher across the financials.”

Mining stocks, too, are still popular among Australian investors, but that goodwill will need to be supported with some good news, Ms Cox says.

“This includes stocks like BHP and Rio, which have been plagued by falling iron ore prices,” she says.

“Both these stocks are still well down from their 2011 highs. For further price rises to be justified the market needs to see growth plans.’’

“If a company in the mining or energy sector disappoints the market, these stocks are more likely to be heavily sold off, at least in the short term.”

Investment management group Dalton Nicol Reid also says investors can expect more takeover activity following the profit season.

Cleaned-up balance sheets and low debt levels could signal a renewed spate of mergers and acquisitions, as directors look for longer-term growth to help secure future profits, Dalton Nicol Reid chief investment officer Jamie Nicol says. “Many companies have also been de-gearing and the combination of healthier balance sheets, low interest rates and scarcity of top line growth could lead to a pick-up in mergers and acquisitions,’’ Mr Nicol says.