What’s So Bad About This Reporting Season?

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This story features QBE INSURANCE GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: QBE
The company is included in ASX20, ASX50, ASX100, ASX300 and ALL-ORDS

By Andrew Nelson

As of this morning 80 companies, or around 20% of the market, had reported full year results. Almost as one, companies have been citing the worsening operating environment over the past year, but the mostly positive run of results leaves us thinking that the outlook for this reporting season may have been overly pessimistic.

According to research from Citi, so far around 75% of results have been in-line with forecasts, while the remaining 25% have been split pretty evenly between under and over achievers.

CommSec has an equally upbeat message, saying of some 79 companies surveyed, aggregate profits were up by 16% over the year with earnings per share, on average, up 8%. CommSec market experts point out the survey covers the majority of companies – both large and small- that have reported by Friday.

OK, so everyone is expressing significant caution with their results, but on the whole dividends are being maintained, organic growth is being chased and there is still plenty of discussion about potential acquisitions. Outlooks, which were always going to come under significant scrutiny given the current economic environment, really haven’t been as weak as expected.

Overall, Citi has only had to trim FY2009 and FY2010 EPS estimates by 2.6% and 2.2% respectively, although the broker says that if not for the sharp drop in bill and bond rates over the past 4 weeks, downgrades of 5% or more would have been on the cards.

While outlooks are pretty positive, Citi warns that profit margins will narrow, making it hard for some companies to hit their earnings targets. The potential drag on margins that worries the broker the most is increasing interest costs due to deteriorating credit conditions.

So this is where the credit crisis rears its ugly head. Or is it?

If interest rates were to stay around current levels over the coming twelve months, the actual interest expense incurred by most corporates over FY09 would be very similar to FY08, Citi predicts. Not terrible news at all.

Nonetheless, data from CommSec back up Citi’s fears about the drying up of margins, saying data show that cost of sales and other expenses rose by 20%, a far faster pace than revenues increased by 2008/09. That said the dollar value of revenues has been higher, so profits have continued to advance.

While that’s all well and good, Macquarie has a different take on the reporting season so far. The broker says that it wasn’t profits that were important, rather  it was  the announcements of major acquisitions like QBE ((QBE)) and CSL ((CSL)) and capital raisings from the likes of CSL ((CSL)) and Leighton Holdings ((LEI)).

Macquarie says the current tough economic environment is highlighting weak business conditions, giving solidly performing companies the ability to leverage off of strong balance sheets and upbeat forecasts bolstered by solid results.

Otherwise, earnings reported so far for the overall market are currently 0.6% below Macquarie’s forecasts and the broker sees a weakening trend in FY09 growth prospects. 

Macquarie singled out a number of results that have stood out, with three positive EPS surprises including Worley Parsons ((WOR)), United Group (( UGL)) and Cochlear ((COH)), while two negative surprises incuded Computershare ((CPU)) and PMP ((PMP)).

The above highlights Macquarie’s assertion that EPS of the broader market is an average of two extremes, with strong growth coming from resources and ongoing contraction from weakness in the industrials sector. The broker admits that while FY08 guidances have been broadly met, a weaker outlook for FY09 is pushing forecast earnings lower across the board.

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