Treasure Chest: Share Prices Lagging Earnings

This story features WOOLWORTHS GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: WOW

By Greg Peel

BA-Merrill Lynch has conducted a quant exercise to identify which ASX 200 stocks are exhibiting sustained earnings momentum. The strategists have then identified which stock prices have lagged this earnings momentum in both upside and downside cases. To exhibit earnings momentum, earnings forecasts need to have moved in the same direction for a consecutive number of quarters.

There are a number of stocks which have seen up to five consecutive quarters of earnings upgrades or downgrades, Merrills notes, and for many of these, price performance has not followed accordingly.

There are 59 stocks in the ASX 200 suffering four consecutive quarters of downgrades, mostly from the consumer discretionary and resource sectors. Experienced traders know it is unwise to ignore such a trend and decide a favourite name must simply be due for a turnaround sometime soon. Yet such a view is apparent in several stocks which have seen their stock prices hold up in the face of such weak earnings momentum.

The major culprits here are Coca-Cola Amatil ((CCL)), Orica ((ORI)), Sonic Healthcare ((SHL)), Spotless ((SPT)), Woolworths ((WOW)) and Wesfarmers ((WES)). Of this list, Woolies, Wesfarmers, Coke and Sonic are all trading at a premium to the market PE, notes Merrills.

On the flipside, there were only ten stocks in the index boasting at least four consecutive quarters of earnings upgrades and fifteen stocks scoring three quarters, eight of which are in the unsurprisingly mining services sector.

Of this list, mining services companies Boart Longyear ((BLT)) and Seven Group ((SVW)), which is dominated by WesTrac, have not seen their share prices keep pace with the upgrades, Merrills calculates. From other sectors the similar stand-outs are Flight Centre ((FLT)), Carsales.com ((CRZ)), Graincorp ((GNC)) and Dexus Property ((DXS)).
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms