Treasure Chest: Potential Earnings Surprises In The Coming Result Season

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By Greg Peel

The Australian mid-year reporting season will be upon us next month, and the preceding “confession session” of last-minute guidance updates is currently ongoing. Each six months brokers apply their own modelling to decide which stocks have the greatest potential to “surprise” on the upside or downside with their results, implying numbers which either well exceed or fall short of consensus market forecasts.

This Treasure Chest can be considered a follow-on from FNArena’s Weekly Analysis published earlier in the week.

CIMB Securities employs both quantitative and qualitative measures in its analysis, looking at a three-year history of earnings surprise or disappointment, the trend in recent broker revisions, the ratio of net earnings revisions, and the dispersion (volatility = risk) of earnings forecasts.

Having crunched the numbers, CIMB suggests the following ASX 100 stocks show the potential to surprise on the upside: Amcor ((AMC)), Commonwealth Bank ((CBA)), Challenger Financial ((CGF)), Monadelphous ((MND)) and Ramsay Health Care ((RHC)).

The following stocks show the potential for downside surprise: Atlas Iron ((AGO)), Boart Longyear ((BLY)), Computershare ((CPU)), Leighton Holdings ((LEI)), OZ Minerals ((OZL)), Perseus Mining ((PRU)) and Sims Metal Management ((SGM)).

UBS carries out a similar exercise, this time concentrating not on the micro factors for each stock but on overriding macro factors. Large cap, low beta, high quality, high dividend yielding companies have performed well this year, the analysts note, but their popularity has had less to do with actual earnings and more to do with return comparisons to other asset classes (eg cash). Meanwhile, over the past twelve months macro factors have been driving corporate earnings in the background, UBS suggests.

For a stock portfolio to outperform the market, one needs to add “alpha” risk, UBS contends, being stock-specific risk as opposed to general market (“beta”) risk. But in the current environment, recent history suggests investors looking to “add alpha” are better served not by trying to pick upside winners, but by trying to avoid downside losers. UBS calls these losers “torpedoes”.

The analysts have thus implemented their modelling in an attempt to identify potential large cap and small cap “torpedoes”, being the stocks that have the potential to disappoint in the coming result season and suffer underperformance as a consequence. The model runs continuously and in the past five months has achieved 56% underperformance of the market (in the sense avoided torpedoes underperformed by 56%).

Within the ASX 100, UBS identifies the potential torpedoes as: Lynas Corp ((LYC)), Atlas Iron, Whitehaven Coal ((WHC)), Arrium ((ARI)), PanAust ((PNA)), Fortescue Metals ((FMG)), Alumina ((AWC)), OZ Minerals, Rio Tinto ((RIO)), UGL ((UGL)), Sims Metal Management, Iluka Resources ((ILU)), Newcrest Mining ((NCM)) and Boral ((BLD)). The analysts also include Macquarie Group ((MQG)) but Macquarie runs on a March year-end and has already reported.

Outside of the ASX 100, UBS identifies: Discovery Metals ((DML)), Billabong International ((BBG)), Boart Longyear, Mount Gibson Iron ((MGX)), Paladin Energy ((PDN)), Sandfire Resources ((SFR)), OceanaGold ((OGC)), Perseus Mining, Beadell Resources ((BDR)), FKP Property ((FKP)), Sundance Resources ((SDL)), Western Areas ((WSA)), Silver Lake Resources ((SLR)), Independence Group ((IGO)) and Transfield Services ((TSE)).

Using another approach, and not regarding the upcoming result season per se, Macquarie runs a model portfolio of what it calls its “counter consensus calls”, being those stocks on which Macquarie believes the market has the wrong view. It has now updated that list and highlighted several “stand-outs”.

Macquarie has an Outperform rating on WorleyParsons ((WOR)) although three other FNArena database brokers have equivalent ratings while four have Hold and one has Sell. Macquarie believes Worley boasts good exposure to upstream oil, de-risked by a diverse geographic spread. The analysts’ forecasts “look reasonable” when compared to global peers, they suggest, and their FY13 earnings forecast is 6% above market consensus.

Macquarie is one of only two brokers assigning a Buy or equivalent rating for QBE Insurance ((QBE)), with all others on Hold. The analysts believe the company’s operational cost reduction program will result in consensus earnings upgrades. Forecast 9% above consensus.

Macquarie has included Twenty-First Century Fox ((FOX)) in its list, although no FNArena database broker has initiated coverage of the News Corp spin-off as yet. The bottom line is this result season will be the last in which the Fox result still incorporates the Newscorp publishing business, which has since been spun off into New Newscorp ((NNC)). The analysts expect another strong result from the cable business, which will henceforth be Fox’s domain. Forecast 11% above consensus.

Macquarie has recently updated its forecasts for BlueScope Steel ((BSL)) to account for both the direct and indirect benefits of the weaker Aussie dollar. Perhaps the Mac analysts were early movers and others have now caught up because as a “counter consensus call”, BlueScope is not a great example. Six FNArena database brokers in total cover BSL, and only one has a Hold rating to everyone else’s Buy. However, Macquarie’s forecast is 47% above consensus.

In a similar vein, APA Group ((APA)) is an interesting choice given Macquarie this morning downgraded the stock to Neutral from Outperform (Hold from Buy equivalent). The analysts note APA’s scrip takeover offer for Envestra ((ENV)) will dilute shareholders and further dilution may be forthcoming before a merger can be agreed. Macquarie joins three other brokers on Hold against three on Sell and a lone Deutsche Bank on Buy. Forecast 5% above consensus.
 

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