Every earnings season holds a couple of surprises. Some nice, some nasty.
The nice surprises are going to come from the mining companies in line with higher commodity prices while the nasty surprises will most likely come from the retail sector. Companies leveraged to the US recovery such as News Corp and Westfield will be ones to keep an eye on as they should show continued bottom line improvements, according to CMC Markets’ Market Analyst Ben Le Brun.
His predictions and tips are summarized below:
Increased dividends for miners as emerging markets drive commodity prices
- Emerging markets and improved global economic conditions should continue driving commodities prices, leading to plenty of upside for mining companies. Fears continue about the impact of tighter monetary policy in China, but remember any tightening makes their growth more sustainable.
- Excitement is building around BHP and Rio Tinto as share buy backs and increased dividends look more likely. Investors love increased dividends and if this takes shape I expect further upside in both stocks.
Watch retailers for real revenue growth
- Danger looms for a few retailers and some have already issued profit warnings eg Woolworths. It is a case of whether fund managers have been pessimistic enough on stocks that have been sold down lately. Softer consumer spending is an ongoing issue, coupled with weaker than expected Christmas sales.
- Look at a company like JB Hi Fi. Although their earnings were average, the stock price rallied after their figures were announced, as it appeared analysts had over shot the mark in terms of pessimism.
- Look for revenue verses earnings per share when dissecting results as you need to be wary of improved operations through cost saving – it does nothing to increase sales, which is what the market really wants to see.
- It will be just as important to analyse futures earnings guidance and current market conditions as well as the headline figures – consumer spending in Australia is expected to remain soft.
Don’t forget flood damage
- Most of the damage from the QLD floods has been documented now and it is time for some companies to confess how badly it has hurt their bottom lines. Theoretically this should have already been priced in, although we will see whether it actually has. All eyes will be on companies such as Suncorp, whose results will put a tangible number on how the floods have actually impacted companies bottom lines.