Treasure Chest: Earnings Seasons Previews

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

By Greg Peel

Recent strength in Australian stock market returns has been driven by PE expansion and rising dividend payouts, notes Goldman Sachs, but now actual earnings growth is needed to drive further gains. Momentum, nevertheless, remains poor. Consensus ASX Industrials forecast earnings growth for FY14 had reached 12% by end FY13 but that figure has since been downgraded to 7%. PEs are only 3% below decade highs, so Goldman is cautious. Given the lagged effect of a weaker Aussie and low a RBA cash rate, the analysts expect earnings growth to emerge in FY15.

US/Europe-exposed stocks remain among Goldman’s preferred exposures on the currency theme. These include Macquarie Group ((MQG)), Brambles ((BXB)), Amcor ((AMC)), Henderson Group ((HGG)), Cardno ((CDD)) and Crown ((CWN)).

Over the past three years of tough operating conditions only four stocks have consistently delivered on earnings expectations, notes Goldman, being Carsales.com ((CRZ)), CSL ((CSL)), Flight Centre ((FLT)) and Ramsay Healthcare ((RHC)). Were they to disappoint this time around, look out. Conversely, there are too many stocks to name which have not provided any positive surprises over the period. Any one of them could see a significant re-rating were this the case, Goldman suggests. But keep an eye on Nufarm ((NUF)), UGL ((UGL)), Goodman Fielder ((GFF)) and Coca-Cola Amatil ((CCL)).

2013 was the year of the dividend handouts but 2014 will be the year of the share buyback as a capital management tool, Goldman believes. Payout ratios are now at the high end and low interest rates support re-leveraging.

BA-Merrill Lynch agrees that this reporting season must show progress towards the earnings recovery already priced in by the market. Merrills is comfortable with the average earnings growth forecast but warns many risks remain at the stock level.

Given Chinese cement and steel producers, rail companies and property developers have overwhelmingly enjoyed upgrades over the past quarter, the signs are good for Aussie miners. Merrills is Overweight the sector and particularly likes Rio Tinto ((RIO)) and Iluka Resources ((ILU)).

Merrills is also Overweight US earners but does not see a lot more room for outperformance at this stage.

On the other side of the coin, the broker feels two years of margin expansion expectations have been baked into some stock prices, thus leaving room for disappointment. Sizeable margin expansion has been priced in for Harvey Norman ((HVN)), Boral ((BLD)), Ten Network ((TEN)), Sims Metal Management ((SGM)) and Cochlear ((COH)), Merrills warns, while for Coke Amatil and Monadelphous ((MND)), margin expansion has been priced into perpetuity.

Those stocks with earnings skews to the second half (and thus the next earnings season) risk market disappointment if first half earnings are weak or guidance fails to impress, Merrills warns. This camp includes Toll Holdings ((TOL)), Tabcorp ((TAH)), Ansell ((ANN)), WorleyParsons ((WOR)), Harvey Norman and Virgin Australia ((VAH)).

The theme for late 2013 was one of rotation out of expensive defensive names and yield stocks and into more cyclical names and Merrills does not expect this to abate. Duet ((DUE)), AGL Energy ((AGK)), Transurban ((TCL)), Woolworths ((WOW)), Coke Amatil and most REITs are already seeing earnings and price momentum below the market average. The exception is healthcare, and Merrills remains Overweight Ramsay, ResMed ((RMD)) and CSL.

CIMB notes revenue growth is still weak, so cost discipline will be well rewarded this season. Earnings growth will be rewarded over dividend security this time around, the broker suggests. CIMB also suggests positioning away from high-yielding defensives and into domestic cyclicals but warns of an earnings skew in consumer discretionary.

With respect to earnings growth, CIMB likes Rio Tinto but not BHP Billiton ((BHP)) and gold names. Stocks the analysts believe could provide positive earnings surprises include Qube Logistics ((QUB)), Orica ((ORI)) and Origin Energy ((ORG)) while earnings misses might spring from Bluescope Steel ((BSL)), UGL, Transfield Holdings ((TSE)) and Virgin.

In the diversified financials sector, CIMB notes Macquarie Group and Perpetual ((PPT)) are leading the upgrade cycle.

UBS has thrown all its views and themes for the season into the mix and come up with a list of stocks the analysts feel have the greatest earnings upside and downside risk.

The upside surprise candidates include Challenger ((CGF)), Henderson Group, Veda Group ((VED)), Fletcher Building ((FBU)), Ansell, CSL, Ramsay, Sonic Health Care ((SHL)), Fairfax Media ((FXJ)), Nine Entertainment ((NEC)), Rea Group ((REA)), Arrium ((ARI)), David Jones ((DJS)), Woolworths ((WOW)), GWA Group ((GWA)), Premier Investments ((PMV)), Retail Food Group ((RFG)) and Vocation ((VET)).

The downside surprise candidates include Leighton Holdings ((LEI)), Lend Lease ((LLC)), Monadelphous, UGL, Worley, AMP ((AMP)), Suncorp ((SUN)), Cochlear, Asciano ((AIO)), Carsales, Trade Me ((TME)), Coke Amatil, Treasury Wine Estates ((TWE)) [now come to fruition with a profit warning], Breville Group ((BRG)), Cardno ((CDD)), Emeco Holdings ((EHL)), NRW Holdings ((NWH)), SMS Management & Technology ((SMX)), Transpacific Industries ((TPI)), Webjet ((WEB)) and Wotif.com ((WTF)).

The Macquarie quant analysts each season dust off their Earnings Surprise Model, and this season the boffins like Slater & Gordon ((SGH)), Domino’s Pizza ((DMP)) and don’t like Ausdrill ((ASL)), News Corp ((NWS)) and Transfield.

Deutsche Bank is cautiously optimistic about the transport sector, for the first time in several years. The broker prefers Asciano ((AIO)), Aurizon ((AZJ)), Toll and McAleese ((MCS)). Optimism does not stretch to the airlines.

In the gaming sector, Deutsche suggests Tabcorp and Echo Entertainment ((EGP)) may provide slight positive surprise, Tatts ((TTS)) is likely to disappoint and Crown ((CWN)) is at risk of disappointing on robust expectations.

In retail, the broker’s top picks are Harvey Norman, Woolworths and Flight Centre.

Morgans (CIMB) is also expecting yet another positive result from Flight Centre.

In online classifieds, Credit Suisse believes Carsales may disappoint, Seek ((SEK)) may have seen a bottoming out and REA could see just a slight decrease in its growth rate.

Readers by now will have lost track of who thinks what is where and how many stocks have received consensus/disagreement with regards to result expectations. Don’t despair, I’ve actually conducted a count.

Macquarie, Henderson, Rio, Ramsay, CSL and Flight Centre all receive two plus scores in all of the above, with no minus scores.

Harvey Norman receives three plus scores but also one minus. Coke Amatil receives three minus scores but also one plus. UGL receives two minus scores but also one plus.

Mona, Worley, Transfield and Carsales all receive two minus scores and no plusses.

Woolies is matched out two for two, while the one for one match out list includes Cardno, Crown, Cochlear, Ansell, Asciano, Toll, REA and Tabcorp.

Note that plus/minus was not applied to some of Goldman Sachs warnings of stocks at risk of moving materially if they surprised one way or the other.
 

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