Earnings reports – the good, the bad and the very good

Financial journalist and commentator on 3AW and Sky Business
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Key points

  • 57% of companies that have reported so far have beaten expectations against a “norm” of 45%.
  • 68% of those companies have lifted profits on a year ago, and 62% have increased their dividends.
  • BHP, Ramsay Health Care and Woolworths will all report this week.

 

With the interim (half-year) profit-reporting season heading into its final week, results have continued to come in better than expected. Resources stocks and the companies that work for them – the mining services companies – have generally had a tough reporting season, but the banks and many industrial companies have shown solid profitability, and welcome largesse in terms of dividends.

Some good some bad

Broker Deutsche Bank says the industrial stocks are playing a blinder, with December half-year net profit up about 15%, the best growth in seven years. But with weak commodity prices hammering resources sector earnings – only partially offset by the lower Australian dollar – Deutsche estimates that overall earnings growth for the half-year will come in at about zero.

Deutsche said last week that about 65% of companies that have reported so far have beaten its interim earnings expectations – well above the four-year average of 52% – while earnings have been about 3% above the aggregate estimate. The broker has upgraded its full-year forecasts for 45% of companies that have reported, which is above its four-year average of 42%, with upgrades of about 1%–2% for FY15 and FY16.

Shane Oliver, head of investment strategy and chief economist at AMP Capital, says that with the season 60% completed, 57% of results have beaten expectations (against a “norm” of 45%), while 68% of companies have lifted profits on a year ago, and 62% have increased their dividends. Oliver says 54% of companies have seen their share price outperform the day results were released.

On target

Oliver also sees nothing from the interim reporting season to give analysts any reason to alter consensus earnings expectations for the full financial year (and even the next.) For FY15, he says, analysts’ consensus is looking for earnings growth across the market of 1%, with a 25% slump in resources profits offset by the performance of industrial stocks (+10%) and the banks (+8%.)

Investment bank UBS also expects full-year 2014/15 earnings growth to be flat, but it likewise contends that if the resources slump is stripped out, the market’s full-year earnings growth will be about a “robust” 9%, helped by the lower Australian dollar and ongoing cost-cutting. But with the market up 9% so far this year, UBS points out that price/earnings (P/E) ratio expansion is driving the rise – in other words, share prices are rising higher than earnings.

With the share market now trading on an “above-average” forward P/E of 15.5 times, Oliver says the market has become “very sensitive” to companies that under- or over-deliver relative to expectations. Thus, we have seen some “significant” share price reactions.

Great expectations

Last week, the market was disappointed by profit results from stocks such as Insurance Australia Group, Seek, Coca-Cola Amatil, Primary Health Care and Bendigo & Adelaide Bank. Also, bumper $5.7 billion 2014 float Medibank Private missed its prospectus revenue growth target, on the back of lower premium revenue. As the prospectus foreshadowed, there was no interim dividend. But analysts still believe Medibank Private can achieve its full-year prospectus forecast of a $250.9 million statutory net profit.

Wesfarmers also fell short of expectations, reporting a 3.7% fall in interim net profit and a four-cent lift in its first-half dividend (to 89 cents a share.) Market consensus expectations were for a fall in net profit of about 2.5% and an interim dividend of 91 cents a share. But the figures from Wesfarmers’ retail businesses were generally strong: Coles improved its earnings by 7.1%, Bunnings lifted earnings by 10%, Officeworks’ earnings were up by 19% and Kmart’s earnings rose 11%. Only Target let the side down, with flat earnings and weaker sales. But investors should perhaps have focused on the 8.3% rise in net profit from continuing operations, and the boost to the interim dividend.

The oils

Santos’ full-year result looked disappointing, given that it was a net loss of $935 million – the company’s first net loss in 23 years – but it came after the company slashed the value of its oil and gas assets by more than $1.5 billion, as it grappled with a sliding oil price. Santos’ revenue rose by 12%, to $4 billion, and underlying earnings actually rose by 6%, to $553 million.

Woodside Petroleum’s full-year result fell short of expectations, but it was a strong performance, with revenue up 25% to US$7.44 billion and underlying net profit climbing 42% to US$2.42 billion: but what was most impressive was a 40% jump in the final dividend, which took the full-year payout to a record US$2.55 a share.

Looking ahead

This week, the market will see the half-year result from BHP Billiton. Market consensus expects net profit to be down – at about US$5.2 billion, compared to US$7.8 billion a year ago – but analysts are looking for a higher interim dividend, at 62 US cents a share, versus 59 US cents a share in 1H14.

On Wednesday, Ramsay Health Care reports, and the market is looking for net profit of about $207 million, compared to $157.8 million a year ago, and an interim dividend of 40 cents a share, versus 34 cents a share in 1H14.

On Friday Woolworths is expected to post interim net profit of $1.39 billion, up about 5% on last year’s $1.32 billion, and boost its interim dividend by about 4 cents a share, or 6.1%.

Other potential positive surprises could come from Qube Holdings, Beach Energy, telecom player M2 Group, data centre operator Next DC, Harvey Norman and Qantas.

But shareholders in the likes of Flight Centre, OilSearch, Worley Parsons and UGL have reason to dread the release of results.

Here are Citi’s expectations for the major companies reporting this week:

Tuesday 24 February

BHP Billiton (BHP) – NPAT US$5,213 million, interim dividend 62 US cents a share, versus 59 US cents a share in 1H14

Flight Centre (FLT) – NPAT $101 million, interim dividend 50 cents a share, versus 55 cents a share in 1H14, potential negative surprise

Oil Search (OSH) – Full-year NPAT US$467 million, full-year dividend 10 US cents a share, versus 4.1 US cents a share in 2013, potential negative surprise

QBE Insurance (QBE) – Full-year NPAT US$859 million, full-year dividend 31 US cents a share, versus 32 US cents a share in 2013

Qube Holdings (QUB) – NPAT $51 million, interim dividend 3 cents a share, versus 2.4 cents a share in 1H14, potential positive surprise

Wednesday 25 February

Corporate Travel Management (CTD) – NPAT $10 million, interim dividend 6 cents a share, versus 4.5 cents a share in 1H14

Ramsay Health Care (RHC) – NPAT $207 million, interim dividend 40 cents a share, versus 34 cents a share in 1H14

Worley Parsons (WOR) – NPAT $110 million, interim dividend 33 cents a share (versus 34 cents a share in 1H14), potential negative surprise

Thursday 26 February

Atlas Iron (AGO) – net loss $52 million, no interim dividend (versus 3 cents a share 1H14)

Next DC (NXT) – net loss $3 million, no interim dividend (no interim dividend 1H14), potential positive surprise

Perpetual (PPT) – NPAT $62 million, interim dividend 105 cents a share (versus 80 cents a share 1H14)

Qantas Airways (QAN) – NPAT $237 million, no interim dividend (no interim dividend 1H14), potential positive surprise

Transfield Services (TSE) – NPAT $32 million, no interim dividend (no interim dividend 1H14)

Friday 27 February

Harvey Norman (HVN) – NPAT $145 million, interim dividend 22 cents a share (versus 6 cents a share 1H14), potential positive surprise

Treasury Wine Estates (TWE) – NPAT $92 million, interim dividend 9 cents a share (versus 6 cents a share 1H14)

Woolworths (WOW) – NPAT $1,391 million, interim dividend 69 cents a share (versus 65 cents a share 1H14)

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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