Solid earnings numbers expected

Financial journalist and commentator on 3AW and Sky Business
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The half-year reporting season has not been a normal one – not when you throw in an alarming market correction.

Usually, investors can get a picture of how their companies have performed, not just in terms of the numbers they have reported, but how the stock market reacts to those numbers. If the profit figure is better than expected, the stock can get a nice price boost, but if it does not meet expectations, look out below. The market is very unforgiving when it comes to a bad news surprise.

However, the fact that companies are reporting into a market that is highly volatile, and under downward pressure from the US market correction, has overshadowed reporting season.

The S&P/ASX 200 index has held up much better than the US markets – it is down 4.6% from its early-2018 peak, while both the Dow Jones Industrial Average and the S&P 500 Index have fallen more than 10%, meeting the official definition of a correction. The Nasdaq Composite Index is down 8.4%.

Over the long-term, growth in company earnings – and to a lesser extent, periods of price/earnings (P/E) ratio expansion – are the major driver of stock market returns – in the long run. In the short term, however, febrile market environments can take over in deciding the direction of share prices.

Add to that the fact that investors are wary on the local economy, and you have a very skittish market this reporting season.

According to Shane Oliver, head of investment strategy and chief economist at AMP Capital, in the early days of the December half reporting season, 67% of companies reporting have lifted profits from a year ago, 56% of reported results have beaten expectations, and most companies have lifted dividends.

Amid the heightened tension, reporting starts to flow more profusely this week and next.

Some of the major companies to report this week include:

TUESDAY

Boral (BLD)

The building products heavyweight told the market late last year to expect better-than-anticipated earnings growth from its Australian business for the full year in the wake of strong construction activity in NSW and Queensland, but that its newly formed North America division had taken a hit from the hurricane season. Boral is seen as a good exposure to Australia’s $100 billion worth of proposed infrastructure spend over the next decade, with the US business also enjoying solid times. Boral reports half-year numbers on Tuesday and is a candidate for a positive surprise.

Cochlear (COH)

Hearing-aid maker Cochlear also reports on Tuesday, and is also a strong chance to beat expectations. The company did not give earnings guidance for the half-year numbers, but back in August it predicted another year of strong growth, after net profit rose 18% in the 2017 financial year. Foreign exchange movements affect Cochlear because 83% of its revenue comes from outside Asia-Pacific. The major recent news for Cochlear is that earlier this month, it turned the first stone on construction of its first manufacturing plant outside Australia, in Chengdu, in China’s south-west Sichuan province. While Cochlear has been selling medical devices in China for 22 years, the company says it is committing to Chinese manufacturing to defend its market share against a wave of new local rivals. China is a major market for Cochlear, where government tender wins have been a big factor in its double-digit earnings growth since 2012.

WEDNESDAY

Computershare (CPU)

Global share registry technology leader Computershare reports half-year numbers on Wednesday. Like Woodside, Computershare is one of the ASX’s cohort of companies that report in US dollars. CPU has told the market that it will benefit from the changes to the US corporate tax rate, and rising US interest rates are also a tailwind for the company. Almost half of Computershare’s US operating earnings came in the first half last year. CPU could also provide a positive surprise.

CSL (CSL)

The biotech star reports half-year results on Wednesday, and the market is expecting good news on the back of a severe flu outbreak in North America. The flu outbreak is so similar to a 2017 outbreak in Australia, it has been called “Aussie Flu.” CSL’s vaccine business, Seqirus, is heading for a maiden profit as rates of vaccination increase. The tailwind for Seqirus could flow into an upgrade to CSL’s full-year profit guidance.

Insurance Australia Group (IAG)

Insurer IAG also reports half-year results on Wednesday, and is another candidate for a positive change, benefiting from rising commercial rates, cost savings, the sale of the Asian operations and its aggregate reinsurance protection situation. IAG could possibly announce a share buyback, although the company might wait until the full-year result.

Woodside Petroleum (WPL)

Oil and gas heavyweight Woodside is one of the companies reporting full-year 2017 numbers, and it should come through strongly on Wednesday. On FN Arena’s collation, analysts’ consensus expects Woodside to report earnings per share (EPS) of 120.1 US cents for 2017, up 15.5% on 2016, and pay a full-year fully franked dividend of 95.8 US cents, up 15% on the 83 US cents paid in 2016.

THURSDAY

Newcrest Mining (NCM)

Australia’s largest gold miner reports half-year numbers (in US$) on Thursday: December quarter production numbers largely disappointed the market, and analysts are now bearish on Newcrest. The market doesn’t expect a change to production guidance: on the cost side, guidance could actually improve on the back of the copper performance at Cadia. The recent sale of Bonikro in Ivory Coast for US$81 million frees up cash for exploration and development of other assets.

Origin Energy (ORG)

Origin Energy is in the dock for half-year results on Thursday and has foreshadowed a post-tax impairment charge of $533 million (more than $700 million pre-tax) on its gas operations. That will take the pre-tax value of the company’s write-downs over the past 18 months to more than $4.5 billion. Having recently sold its Lattice Energy business to Beach Energy, Origin has shifted its focus to its Gladstone-based Australia Pacific LNG (APLNG) project. Higher gas prices and LNG production at APLNG helped Origin’s sales surge to $1.37 billion during the second half of 2017. The December quarter report said production APLNG matched the September quarter, at 63.4 petajoules. Earnings are expected to be flat, with no interim dividend. For a full-year earnings upgrade, investors would need to see price increases for non-LNG contract gas.

Sonic Healthcare (SHL)

Global healthcare business Sonic Healthcare offers up half-year results on Thursday: analysts seem to think that diagnostic volumes have picked up in Australia, implying that there is room for a better-than-expected result, and a lift in FY18 guidance. Intriguingly, though, some think that a proposed reduction to US Medicare reimbursement rates could produce the opposite, having not featured in the company’s guidance – although that affects only 4% of Sonic’s revenue.

Telstra (TLS)

Telstra reports half-year results on Thursday: investors will get their first look at the lower dividend, and also details of the restructure of the company’s pay TV interests. The outlook statement will be closely watched for indications of how Telstra sees the competitive situation, how the NBN roll-out is affecting its earnings growth, and how it sees the impending entry of TPG into the mobile market. There is also the effect of the recently announced write-down (to zero) of the value of US video platform Ooyala, just four years after Telstra paid US$330 million for it. Telstra will take a US$219 million (A$273 million) non-cash charge to its half-year result as a consequence of the write-down. This could affect dividends: Deutsche Bank says Telstra will have to pay out about 100% of reported earnings to meet interim dividend expectations. The company has stated that it wants to limit shareholder payouts to between 70%–90% of profit.

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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