Posted on Friday, 22nd January 2010 by admin
The profit-reporting season begins this week – and, after last year’s rough ride, it’s more critical than usual.
FINANCIAL stocks, mining and energy companies, airlines and discretionary retailers are expected to be among the big winners in the coming profit-reporting season, market experts say.
But those companies that disappoint in any way, particularly in relation to their business outlook statements, can expect their shares to get a pasting, as has occurred in the US over the past week.
The local profit-reporting season begins this week and is shaping up as one of the most important periods for shareholders in a long while.
That’s because the recovery phase of the sharemarket rally is pretty much over following the 50 per cent or so market gain since March and we are heading into a transition period in which share prices are being increasingly driven by company earnings.
Shares are no longer dirt-cheap, as they were months ago, and are now priced on a forward price-earnings ratio of about 15, which most would deem ”fair value”.
Yet the six-month period to the end of December was also a sluggish time for the Australian economy, so the profit results are likely to be decidedly mixed. That’s why so much rests on the company outlook statements.
AMP Capital Investors head of investment strategy Shane Oliver says expectations are running high and that’s why companies can expect share prices to get hammered if they disappoint.
“The hurdle is now a lot higher and it’s likely to be similar to what we have seen in the US,” he says.
“Around 80 of the top S&P 500 companies have reported their December quarter figures, and 80 per cent of them have been ahead of expectations – yet Wall Street has continued to focus on those that have disappointed, both in terms of the overall profit figure and in the detail.”
Dr Oliver expects the local company profit season to be positive, showing an overall 10 per cent lift in net profit, reduced to a 5 per cent gain in earnings per share as a result of the big share issues that occurred last year to bolster corporate balance sheets.
In line with the mixed nature of the reporting season, he expects 55 per cent of companies will report a profit fall and 45 per cent show a profit gain.
“The profit season won’t be a particularly strong one because economic growth through the second half of last year was fairly moderate,” he says.
“But it should show the end of the big profit falls, some surprises on the upside and some cautious optimism on the future – if it does that it will be considered as reasonably good and provide confidence for a decent recovery in earnings.”
CommSec chief economist Craig James expects mixed results, with consumer-focused businesses doing reasonably well but those that are more business-dependent being less positive.
“I think people will be focusing on the earnings guidance more than the actual results,” he says. “2009 was a difficult year and the good news is that it’s over, so we now want to see some validation coming through about some of the higher PE ratios we’ve got.”
Mr James says investors should not get into too negative a frame of mind at the moment, despite the market falls last week.
“The news flow has been running negatively and that’s affected the market – people have started to focus on the negatives rather than the positives,” he says.
“But what we are seeing now is a useful period of consolidation before we get the next thing to take us up another notch. So investors should be very careful not to get too negative at the moment or they will pay the price.”
The analyst team at RBS Equities says the profit-reporting season is critical for shares and they expect it will surprise on the upside and provide enough ammunition to keep the sharemarket heading higher.
It predicts the December reporting season will be solid in terms of the level of pleasant surprises, partly because the confession season – the period just before the actual reports when companies warn they will not meet analyst expectations – has been so quiet.
It is looking for upbeat management outlook comments with plenty of talk of expansion, as most companies are now well capitalised.
RBS is forecasting earnings growth of 6.8 per cent for the 2010 financial year, jumping to a strong 28.7 per cent profit gain in 2011.
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