Listed company share price performance over longer periods is to a significant degree, dependent upon credibility. Credibility is established by management delivering upon investor expectations and most importantly, delivering upon their earnings forecasts. On Wednesday Fletcher Building announced a downgrade in earnings for the coming half-year that peeled 12% off the company’s share price and the market was not impressed. The announcement was widely seen as in direct conflict with the positive messages the company has been putting out over the last few months.
Clearly building activity in the residential and commercial sectors (both here and in Australia), is slow and the Canterbury rebuild will not begin with any real pace until the second half of 2012 – and quite possibly later. But even this assumes an abatement in aftershocks which has not been the case so far given the recent quake on 9 October at 5.5 and the probable further difficulties surrounding insurance cover for builders and new properties.
It appears that Laminex, the company’s second largest division has been the most affected operation whereas the Crane business that was acquired in April, seems to be broadly on-track in terms of earnings. There has been earnings pressure across the sector but Fletcher has to date seemed somewhat immune, but the following graph may tell a story – the Fletcher share price has started to underperform over the last three months (down around 4% versus a market decline of about 1%). One thing is for sure, the market is long in Fletcher Building shares and this event will cause a re-think. There will be those investors who think the price has fallen excessively and who will be buyers, but there will be others who feel that there may be more bad news to come and that in addition, the Fletcher share price deserves an ongoing discount if management are tardy in delivering bad news to the market.