Weekly Broker Wrap: Reporting Generally Positive, But…

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This story features RESMED INC, and other companies.
For more info SHARE ANALYSIS: RMD
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Andrew Nelson

Last week the domestic reporting season got into full swing and brokers took the chance to update their scorecards with the latest runs. Another global fund manager survey sheds light on current levels of investor confidence, while the rate easing cycle may be close to done.

On Friday, UBS gave us the latest on the reporting season thus far, noting while results have been in-line with estimates for the most part, FY13 forecasts have been watered down by about 2% in response.

Yet despite the slightly lower than expected outlooks provided, the broker points out that share price responses have been positive, mostly.  UBS reports that about 33% of post release responses have been positive, versus around 26% negative and 44% neutral. Looks like expectations were set low enough.

UBS reckons that for the most part, the results show that profit conditions have remained difficult, although there are a few emerging signs of possible improvement. However, the few signs of improvement are juxtaposed by increasingly mixed conditions in what was a previously omnipotent, capex-strong mining sector.

On the broker’s numbers, the market is on track to post 2% negative EPS growth for the year if things keep tracking as they are now.

Analysts at Goldman Sachs are even more concerned about the downward revisions to FY13 forecasts, the broker having so far cut its forecasts for 56% of the companies it covers. The broker notes that if the first week’s trend continues, it will be the most negatively skewed reporting season since the onset of the GFC.

Otherwise, the broker’s numbers are similar to those of UBS, with GS reporting 39% of companies have beaten its expectations, at least at headline levels, while 28% have missed.  There’s a bit of good news as well, with the number of positive surprises up from last year, but the broker thinks this is due to a lower level of expectations heading into reporting season.

The broker sees a few key themes emerging that it thinks deserves some extra attention. The mining investment cycle is slowing, domestic housing activity remains at historical lows (although may be nearing the bottom), balance sheet restructuring continues in order to wring out every extra EPS penny and boards seem quite prepared to increase payout ratios to sustain dividends.

Analysts at Macquarie, who started off the season a little more negative than most, end the first week with expectations for EPS to be down an average of 3.5% intact. FY13 EPS forecasts are pointing to 8% growth and this is only a little shy of the broker's expectation as well.

Macquarie notes the companies that have delivered some of the better quality results, either in-line or in excess of expectations, have been rewarded. See ResMed ((RMD)), Computershare ((CPU)) and Bradken ((BKN)). 

However, quality and outlook have played a part, with Transurban ((TCL)), Telstra ((TLS)), Tabcorp ((TAH)) and Stockland ((SGP)) delivering on forecasts, but punished by weaker quality results or outlooks given the disappointment they’re not as strong and dependable as had been hoped.

The broker notes this puts both “earnings certainty” plays and “defensive yield” plays under the microscope. The broker reasons that despite what may have been strong performances over the past year, safe earnings companies like AGL ((AGK)), Woolworths ((WOW)) and Coca Cola Amatil ((CCL)) and solid yield plays like the banks and major infrastructure companies are also going to need to demonstrate income certainty if the market is going to react positively to their results.

In the meantime, says Macquarie, expect the run of FY13 earnings downgrades to continue.

The latest from the Bank of America-Merrill Lynch Global Fund Manager Survey also provides some interesting, if not very traditional insights into the mind of money managers the world over.

The broker reports the increasing expectation for government stimulus has taken over the roost and has at least eased fears of global recession. However, high cash levels, cautious equity allocations and an increasing level of distrust in banks has investors resisting bullishness, instead favouring  a short-term bounce in equities, rather than seeing the market at bottom.

There has been a modest re-allocation from cash and bonds into equities, but investors have remained underweight commodities, with a big push into real estate investment trusts (REIT) seen on the back of high yields and the hopes for a US real estate recovery.  

The three most overweight sectors are Pharmaceuticals, Tech and Staples, although the broker notes Tech is dropping to February 2009 levels as investors continue to move away from the more cyclical areas of equity markets. On the broker’s numbers, the biggest consensus short positions are currently in Materials, Banks, Energy, anything Japan and Eurozone equities. The longest positions are in REITs, Discretionary, Staples, Pharmaceuticals and US stocks.

The broker has also stripped down the survey to look at the Australian listed financial sector, noting investors are increasingly more overweight insurers than banks.  The broker notes general insurers are being bought on defensive appeal. Still, National Australian Bank ((NAB)) remains the most liked (in terms of portfolio inclusion) stock among the large cap financials. This is followed by ANZ ((ANZ)) and Westpac ((WBC)), with CommBank ((CBA)) increasingly disliked.

QBE ((QBE)) is seen by investors to have the most potential for upside surprise, while Suncorp ((SUN)) and Macquarie Group ((MQG)) are seen to offer the most downside. Among insurers, the broker notes the majority of investors still expect EPS growth in the sector will be revised upwards by 1%-10% over the next 6 months.  For banks, the picture is a little less positive, with 43% of those surveyed expecting forecast EPS growth for the sector to fall 1%-10%, while 39% expect no change in forecasts.

BA-ML notes that margin squeeze is seen as the biggest threat to the bank sector valuations, with slowing growth now a secondary concern.  The majority of those surveyed believe that dividends are sustainable for both banks and insurers.

Lastly, Goldman Sachs has had a look at the current interest rate environment in Australia, noting that while a little more help may be needed, the current cycle is showing some real signs of slowing.  Wage growth is starting to pick up, notes the broker, but this is mostly contained in WA and the mining sector. Otherwise, it sees no evidence of a broader improvement that might influence the RBA.

Thus, the broker thinks the RBA is still some ways off from needing to make another move. There could well be some need in the months ahead, but the broker thinks we’re near the end of the current easing cycle and the markets are yet to realise this. Overall, the broker expects just one more, final 25bp cut in November.

 
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