Compared to this time last year, many stockmarket commentators are expecting the current reporting season to be a much happier affair - with a number of companies expected to report robust top-line numbers. The trick for investors is to determine which companies will post results that far surpass market expectations - as this may result in a nice share price kicker for the stock.
So which stocks are brokers backing this reporting season? And which companies may disappoint?
The good news for investors is that there appears to be greater clarity and guidance this reporting season, compared to seasons past. Also, the gloomy sentiment surrounding the GFC - when even stellar results were eclipsed by negative market sentiment - seems to have dissipated somewhat.
With most of last year’s bad news already priced in, stocks that can get through the current reporting season slightly under, or neutral on projections should not be beaten around by the market too much - especially if they can also demonstrate operational improvement.
As a case in point, shares in construction and mining company Alesco (ALS) increased by around seven per cent to a 10 month high after announcing an 82 per cent fall in first-half net profit to $1.76 million. This followed revelations that demand for the company's goods may spike once flood-effected reconstruction work starts.
Profit tumbles cannot be viewed in isolation. It's important to compare results with historical averages, rather than full year 2009/10 when lower earnings reflected GFC lows.
Continuing last year’s thematics, brokers unanimously expect resources and related-stocks to outpace the rest of the Australian economy on the back of a strong medium-term outlook for commodity prices.
On the flipside, industrials, banking and property stocks will continue to feel pressure from rising input costs including materials and labour. Investors should watch out for declining single-digit EPS growth forecasts from many stocks in these sectors.
The big negatives for companies this reporting season include the Queensland floods, a high Aussie dollar, and gloomy consumer sentiment. The market has already witnessed downgraded earnings from Virgin Blue (VBA), GUD Holdings (GUD), Coca Cola Amatil (CCL), Suncorp (SUN), GWA Group (GWA), Energy Resources Australia (ERA), Macarthur Coal (MCC), Insurance Australia Group (IAG) , Harvey Norman (HVN), JB Hi-Fi (JBH), Billabong (BBG), Qantas (QAN), Leighton Holdings (LEI), The Reject Shop (TRS), QR National (QRN), Downer EDI (DOW), and Woolworths (WOW) - which suffered its biggest one-day plunge of 2.59 per cent late January following revised profit growth expectations down from 8-11 per cent to between 5-8 per cent.
We canvassed the market to see where brokers are putting their money this reporting season, and this is what they said.
Roger Leaning, Head of Research, RBS Morgans
Better managed big miners, pure-plays (especially in gold and iron ore), and ‘early-cycle’ mining-service providers, plus global industrials, should provide positive earnings surprises. Many downgrades will come from stocks affected by the recent floods. “With all the bad news already in retail and media sectors, investors should position themselves for improved flow through to key stocks,” says Leaning.
Kien Trinh, Quant Analyst, Paterson Securities
Resource stocks to outperform due to strong demand for commodities, notably pure-play miners wired to gold and copper prices. Loss of earnings momentum for stocks directly affected by recent floods. Beneficiaries and casualties of the high Aussie dollar will also be a major theme this reporting season.
Michael Feller, Lincoln Indicators
Based on China demand, resources and mining services will remain standout sectors, with stocks wired to precious and base metals - like copper, nickel, zinc and gold among those reporting stronger returns. Low-cost, mid-tier gold producers expected to benefit most from a gold price above US$1,300/ounce. A High Aussie dollar will continue to hamper stocks with significant exposure to offshore earnings, notably healthcare and consumer goods manufacturers. Sustained margin pressure for banks and consumer discretionary stocks expected.
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