Reporting season scrutinised for signs of value and stability

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As reporting season kicks off, investors will be watching for signs of value and earnings sustainability, as well as eying specific stocks and sectors and the broader economy, according to Michael McCarthy, chief market strategist at CMC Markets.

Recently the Australian bourse has been weighed down by international issues such as a potential China slowdown, European and US debt issues along with local concerns like the high Australian dollar and consumer reluctance to spend.

“Depressed share prices have attracted many investors to companies which are looking like good value now on their price to earnings ratios and dividend yields, but whether their earnings are sustainable will determine their value as an investment. Around 160 of the top 200 companies reporting over the five weeks will provide some valuable insight into this earnings sustainability,” said Mr McCarthy.

For investors, it is also important to be on the alert for companies and industries displaying earnings growth, as this will be a major factor in share price growth.

The last 12 months has seen analysts downgrade earnings forecasts across the board as optimism about a global recovery has faded to concern over mixed economic signals.

“The good news is for the most part any surprises have already been captured in these downgrades so the surprises are likely to be better than expected earnings, albeit with a few exceptions,” Mr McCarthy said.

Indications are also that improved cash flows and reduced debt will mean the potential for capital returns.

“Given a generally cautious investment environment and weak market sentiment, investors will pay particular attention to company views on the outlook for business over the coming year,” Mr McCarthy said.

Sector focus

Consumer Discretionary – focus on outlook statements and strategies to cope with lower sales

Consumer discretionary stocks, particularly retailers, are under pressure from recent downgrades, driven by fears about the activity of consumers in the eastern states and falls in reported retail sales. Recent guidance from David Jones and Myer is pointing to falls in profit of between 0.5 and 5%. JB Hi-fi’s result will attract attention in light of the buyback of 9.9% of its capital earlier in the year. Media stocks are also expected to show modest earnings per share falls.

Investors and analysts are likely to focus on outlook statements and any strategy changes to deal with the current lower level of sales. Of particular interest will be any initiatives to deal with competition from online retailers, especially in light of the recent strength of the Australian dollar.

Sector leader reporting dates: 23/8 Flight Centre, 31/8 Harvey Norman, 16/9 Myer

Consumer Staples – will shed light on consumer activity

Consumer Staples is an important sector as it will shed light on consumer activity. Analysts will carefully examine comparable sales in grocery giants Woolworths and Wesfarmers (Coles). Woolworth’s recent Q4 sales results point to comparable growth around 4%, headline around 6% and profit growth around 6.5%.

Sector leader reporting dates: Coca-Cola 9/8, Wesfarmers 18/8, Woolworths 25/8

Financials – divergence across sector

There are several key aspects to the reports from the financial services sector. Credit growth is in doubt, given conservative consumers and a well-capitalised and cash rich corporate sector. CBA is the only big four bank to report, expected to show a profit increase of 8 to 8.5%. Bank of Queensland is likely to report a 10% drop in earnings due to problems with its commercial property exposures.

Diversified Suncorp could be a strong performer on the back of an improved insurance pricing environment, although its banking business is the likely swing factor. Property groups could diverge, with Westfield’s improved US earnings offset by a strong Australian dollar, and Goodman Group likely to report a large lift from improved development profits.

Sector leader reporting dates: CBA 10/8, Westfield 18/8, Suncorp 24/8, Bank of Queensland 13/10

Materials – heavy bearing on the overall share market

Resource stocks will remain a focus, whether mining or energy related. This group represents around one third of the value of the overall share market and will have a heavy bearing on its performance over the next six months.

Metal and oil prices are at elevated levels, ensuring good revenue flows in US dollar terms. Exchanging this income to Australian dollars is likely to offset this benefit, and will be a focus for investors and analysts. Another area of concern will be cost containment. Project delays due to weather disruption are largely factored in to current share prices, but the effects of wages pressure is less clear.

Sector leader reporting dates: Rio Tinto 4/8, Alumina 11/8, Newcrest 15/8, BHP Billiton 25/8.

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