By Chris Becker
Earnings continued on Wednesday, with three major companies reporting results, Computershare (CPU), Stockland (SGP) and Rio Tinto (RIO).
Computershare (CPU), which dominates the IT sector by virtue of its size, announced that FY net income fell 41% year on year to $156 million, well below analyst estimates of $242 million, but the market was aware due to a profit downgrade in June. Note the chart below of CPU and the IT sector itself:
The reason for the fall was due to several factors, including an impairment charge on its European assets, acquistions and amortisation charges, but the main concern is a marked decline in takeover activity and share issues falling – hallmarks of a bear market:
Analysts still weight the company, with 11 buys, 5 holds, 1 sells with an average price target of $8.69, as the stock closed up 6% to just over $8 yesterday. Growth in forecast earnings is still quite strong, but in the current environment it remains to be seen where such earnings will eventuate.
Delusion about housing affordability met with the reality of financial statements yesterday as property developer Stockland (SGP) announced the “worst market in 20 years” as buyers – who can’t afford their product – stayed away in droves, hitting the bottom line by 35% for the full year.
SGP gave a gloomy outlook, suggesting FY13 earnings per share (EPS) would be lower than this year, although the dividend is likely to be maintained and consensus analysts forecast a rise in earnings of 4% for next year (9 buys, 2 holds, 3 sells). The stock fell 5% yesterday, having moved sideways from falling sharply in May last year:
Rio Tinto (RIO) reported after the close, and as noted yesterday, gave an extremely rosy outlook for its iron ore and China leveraged business model. Earnings for the six months to June fell over 34%, due to lower prices. Iron ore particularly hit the very fat margins (the cost of extraction is around $80 per tonne), but other minerals like copper and coking coal combined saw earnings fall around 75%:
Lucky for them, the company claimed a $US1 billion tax deferral on the mining resources tax (which seems to have been introduced at the absolute peak in the commodity cycle), which boosted net profit to just under $US6 billion. The company remains very bullish on Chinese growth, predicting 8% annual rises in GDP for the Middle Kingdom, and in the short term opined that stimulus projects in China will boost demand and prices.
Capital expenditure on its projects would remain on track, but operational expenditure on thermal coal is also a concern, announcing the closure of the Blair Athol mine in Queensland, and delaying decisions to expand other mines. Chief Tom Albanese said:
A combination of these weaker coal markets combined with the higher costs and higher currencies have probably bought us back to where we were five years ago.
Which seems right given the share price plunge:
The result was around 5% better than analysts expectations, who are all still in love with the stock, giving 15 buys, 0 holds and only 1 sell with an average price target of $78.20 per share.
Full valuations and analysis of these results will be posted in the next edition of Macro Investor in the “Stocktake” section.
Chris Becker is an investment strategist at Macro Investor, Australia’s leading independent investment newsletter covering stocks, trades, property and fixed interest. Each week Macro Investor publishes tables on the top ten most undervalued and overvalued stocks on the ASX. A free 21-day trial is available at the site.
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The author owns Cochlear (COH) shares for his family superannuation fund, and the Macro Investor model portfolios have positions in some of the stocks mentioned above.