Macro Investor: Earnings season preview

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By Chris Becker

It is upon us – the end of financial year earnings season for listed stocks on the ASX200. Not all are reporting over the next month or so, but 181 companies will by the end of September with a few more in October. This is going to be one of the most interesting reporting seasons in the last five years for the following big picture reasons:

  • Reserve Bank of Australia (RBA) has initiated an easing cycle alongside additional government stimulus
  • Federal Government is attempting to go back to surplus, withdrawing aggregate demand from the economy, as is the QLD austerity measures
  • The nexus between bank funding costs and disleveraging by Australian households as credit growth is at 35 year low (but still expanding on a huge base of debt)
  • Planned mining capex (capital expenditure) for FY2013 and beyond may be stalled/eliminated as commodity prices come off boil
  • Roll out of the National Broadband Network (NBN) and the opportunities for IT and communications stocks
  • Aussie dollar likely to remain high, even as commodity prices fall, putting pressure on exporters, import-competing firms, and those companies with significant overseas operations
  • Unemployment expected to rise over coming year, potentially putting pressure on home prices (bank earnings) and consumer discretionary focussed businesses
  • Divergence between assumed earnings growth and the general slowdown in global economic conditions

The last point is key – and a point discussed more thoroughly in Monday’s Wrap at Macro Investor:

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…now the underlying condition for much of the global economy is debt-saturation and oversupply. When stimulus is removed there is no hand-off to the private sector. No new borrowing to drive the cycle forward. Instead there is a slump into an underlying lack of demand and deleveraging. But it’s not a sudden shock. It’s more a relentless and wearying melt of sentiment as the economic data worsens.

So stock markets levitate and bounce around in large ranges on the utterances of central bankers, without ever finding their moment of release.

At Macro Investor, we’ve been tracking the consensus forecast earnings for the index and its constituents, plus price targets and adjusting our estimate of value for the index via our weekly StockTake section. In the chart below, the current estimate for CY12 and CY13 is far lower than six weeks ago, as earnings estimates have been pared back getting closer to the reporting season:

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Of course, this valuation is predicated on the very robust earnings growth eventuating, with our valuation estimates assuming a lower path. Indeed, the market is expecting earnings growth to follow through, with the trailing price/earnings ratio (PER) expanding – now getting back to the levels of the 2003-2007 boom:

This week sees 18 companies reporting, with some standouts and questions including:

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  • Bendigo and Adelaide Bank (BEN) – what impact will the melting housing market have on regional banks?
  • Cochlear (COH) – have they recovered sales from their recent Nucleus 5 product recall?
  • Bradken (BKN) and Leighton (LEI) – leading statements on future capex and opex will be closely watched
  • Rio Tinto (RIO) – are further impairments on the way? are volumes making up for the declining iron ore price?
  • Stockland (SGP) – doing as well as Australand or continuning to struggle to make sales
  • Tabcorp (TAH) – can the carbon tax handout funds that went into pokies be sustained?
  • Telstra (TLS) – is this once an infrastructure company making the transition to a customer service company in the NBN environment?

As I said, this will be an interesting couple of months. Stay tuned.

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.

You can follow Chris on Twitter.

Disclaimer: The content on this blog should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation, no matter how much it seems to make sense, to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The authors have no position in any company or advertiser reference unless explicitly specified. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult someone who claims to have a qualification before making any investment decisions.

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.

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