Shares deliver on low expectatons

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As commented in this morning’s Macro Investor, Australia is facing a drop in its national income. The same trend seems to be playing out in company income, at least for listed stocks. Deutsche Bank notes the drop in income:

“Reporting season confirmed that June half profit growth was the worst since the global recession (down 5% vs pcp), and FY13F profits have been cut (for 67% of companies, by 2% in aggregate). But with expectations continually lowered through this year, these outcomes are no worse than expected a month ago. Indeed, 57% of companies ended up beating expectations for June half earnings, and solid market performance (both absolute and relative to global markets) suggests investors were not overly worried.”

Banks did worse than resourecs and industrials, which have produced stronger than expected results on the whole. Indeed, 57% of companies beat expectations, which says something about the expectations. Yield is very much the focus for investors, unsurprisingly in such a bearish environment. Here are some of the bigger stocks’ results:

“By size, the biggest negative contributions have come from Commonwealth Bank, Telstra, NAB, ANZ and Suncorp. In contrast, BHP, Wesfarmers, QR National, Rio Tinto and Newcrest have been on the positive side of the ledger. At the sector level, the majority of industrials and resource companies beat expectations this reporting season, while the banks largely disappointed.”

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What is looming is a management challenge, finding ways to improve productivity to maintain margins. Declining profitability seems to be a theme at both the national and company level:

EBIT margins were down ~30bps, instead of dropping 10bps as expected, leading to softer EBIT growth than expected. The ultimate impact on NPAT was cushioned however by low net interest expense, reflecting pay down of debt and lower interest rates.

Steel and transport seem to have improved after their previous falls. Gearing is low, which majkes it easier to manage declining profitability:

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The net debt/equity ratio was consistently around 45-50% in the 15 year period leading up to the global recession, but is now around 35%.

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