We are only early days into the Australian reporting season, but the opening salvos have not done much to suggest that things are turning for the better. Of the 15 large cap Industrial stocks to report so far, we have seen earnings downgrades for 11 of them for the June 2013 year. Particularly disconcerting is that this list of stocks represents a large cross-section of sectors across the market: retail, mining services, healthcare, construction, infrastructure, property, media, telecoms and gaming.
Many of these EPS downgrades have been material, up to a negative 12%. Given that the market has entered this reporting period with expectations of +15% EPS growth for Industrials in FY13, the early trend suggests that this figure is only going one way, and it’s not up!
Related to this, companies’ outlook commentaries have continued to be fairly cautious. A key theme has been that companies do “not expect material improvement to the current difficult operating environment.” In the residential property space, we have been told that “the new housing market remains soft and lower mortgage rates are not yet having the same positive impact as occurred in previous cycles.” These sorts of comments suggest that FY13 will be another year of low growth.
There is another lesson being learnt in these early days of reporting season as well. There are a number of stocks being priced for an ideal outcome that are being sold aggressively on results. There are also stocks with poor expectations that are rallying sharply on results that are inline or better. Where expectations are high, any disappointment is being severely punished, but where expectations are low, share price reactions on earnings beats can be hugely positive.
Marc Whittaker
Portfolio Manager