■ Elusive growth: The current reporting season confirms that growth continues to be elusive for Australia Inc. Results missed EPS expectations by about 1% and profits are set to contract for the second consecutive year. While the bottom-up consensus outlook is for a 10%–15% EPS expansion in 2017, we need to consider that analysts have usually been 10%–15% too optimistic on year-ahead forecasts.
■ More quality: However, the quality of the average company in the ASX 200 has improved. Financial leverage has peaked, companies are more cash generative than they have been for years, and there remains a strong focus on conserving capital. The improving quality of Australia Inc. should help sustain the current premium P/E multiple. But for further upside from here we need to see clearer signs of a turn in corporate profits.
■ Stocks: The current reporting season has provided a number of stock opportunities. We add the cheapest stock in the ASX 200, Qantas, to our Long Portfolio. Management is clearly focusing on cash and we expect considerable capital returns to come. We also add Sonic Health Care to our Short Portfolio. It has rallied on poor quality results. The outlook is for muted growth but the stock trades on a larger than usual P/E premium.
Between zero and 5% seems about right based upon a rise in the iron ore price. That last line is a classic with growth reliant upon a “larger than usual P/E premium”. Rate cuts in other words.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
