With Australian company earnings reporting period recently behind us, it is timely to take stock and assess their report card. Should we judge it a pass or a fail?
On the subject of earnings growth, we can rate the season a credible pass. While market earnings growth was still negative, excluding the Resources sector we actually saw the market report growth of around 4%. This is not too far from what we would consider normal growth of 5-6%. This growth was achieved in many cases on better than expected revenue growth as well as better cost control. In turn, this allowed for better cash flow generation and better than expected dividends as well.
What was interesting was that it was the large end of the market that weighed on earnings, with good growth emerging in the small and mid end of the market. So, for example, we had the earnings of traditional heavy weights such as BHP and Woolworths going backwards, while companies such as Qantas and Vocus Communications reported strong double digit growth.
On the subject of country exposures, there was good performance from stocks leveraged to the domestic economy, particularly housing and consumer related names. The likes of Boral, Mirvac and Harvey Norman all reported above average earnings growth. Domestic focused stocks moved to the top of the class this reporting season.
It was a more mixed performance from companies exposed to offshore earnings. While the likes of Brambles and Amcor were very strong, with their exposure to developed economies, names such as Ansell and Crown, with exposures to emerging economies, disappointed. A pass mark here for this group of stocks, but they certainly need to pay more attention in class!
There was a relatively pleasing performance from the big banks, with profit still on track to grow on average by around 4%. While there are some concerns around the outlook for bad debts, at the moment these remain benign, and the Banks’ balance sheets are improving. Commonwealth Bank was able to report stable interest margins and 6% lending growth. Not bad for a company that is likely to report A$9.5bn in earnings this financial year. Just like a good student, the Banks are trying their best and not causing too much commotion in class.
Overall, one would classify reporting season as performing better than expected. A pass mark for this season. However, like in all things, there is room for further improvement.
Marc Whittaker
Portfolio Manager
Disclosure of interest: Milford Funds Ltd. holds shares in Qantas, Vocus, Mirvac, Harvey Norman, Crown, BHP, and Commonwealth Bank of Australia on behalf of clients.
Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.