reporting season bloodbath expected by analyst

For once the analysts will be on the money. In my view anyway.


Sara Rich | January 26, 2009
Article from: The Australian

SHAREHOLDERS should expect the worst from the coming profit reporting season.

Analysts are betting that the companies falling short of their earnings forecasts will exceed by eight to one those that meet their forecasts.

The February half-year reporting season will be the first major results period since the financial crisis set in and falls at the start of what experts expect to be the deepest earnings recession in 20 years.

Drastic declines in consumer spending, the depreciating Australian dollar, weak commodity prices, tight credit markets and asset impairments have devastated company earnings in the past year.

Earnings per share are tipped to fall an average of 8 per cent, while overall profit growth is believed to be down 5 per cent for the first half of 2008-09 compared with a year ago.

Goldman Sachs JBWere analysts believe companies with downside risk to earnings outnumber those on the upside by 7.8 to one.

In the February reporting season last year, the ratio was a more balanced 1.4 to one, and in previous years it swung the other way and company results came in ahead of expectations. According to AMP Capital Investors head of investment strategy and chief economist Shane Oliver, non-financial industrial stocks, such as consumer and media companies, and financial stocks will be among the worst performers.

He estimates a fall of 10 per cent for the average earnings of both sectors. "Generally speaking, consumers still have to go to the supermarket, and likewise healthcare stocks will still do reasonably well because people still spend on healthcare," he said. "But consumer discretionary stocks have felt the full brunt of the economic downturn as demand for their goods and services declines."

Goldman analysts believe retail giant Harvey Norman has been one of the worst affected, citing a sharp decline in pre-tax profit during September, and Citigroup analysts forecast a 28.3 per cent earnings drop for the battered stock.

Media companies such as Fairfax Media, Consolidated Media Holdings, Sky Network Television, Prime Media Group and West Australian Newspapers will also be under the spotlight after suffering steep declines in advertising revenue.

In the finance sector, Citigroup head of equity strategy Graham Harman said, any stock that was linked to the share market would most likely report reduced earnings.

Citigroup analysis puts Challenger Financial Services Group, the Australian Securities Exchange, Computershare, IOOF Holdings and Perpetual in this category.

Dr Oliver said that although not all of the major banks were scheduled to report next month, their earnings risk had increased on the back of higher funding costs and lower credit growth. "There is also the potential for another round of increases in bad-debt provisions," he said.

Resources may be the only sector not to deliver profit falls but only because it could "still be reporting some of the glory days left over from the boom", Mr Harman said.

Dr Oliver estimates average earnings growth will be up 10 per cent for the sector, but warns it will be a mixed bag due to variations in commodity prices during the second half of last year.

"You have got the big miners getting the benefit of the strengths in the iron ore and coal prices still feeding through," he said.

"But for the energy producers, where the oil price literally collapsed, and for some of the miners that are focused on metal prices, you will probably see declines."

Citigroup analysts said record bulk commodity contracts last year might shield the results of resources heavyweights BHP Billiton and Rio Tinto.

However, these will not protect their full-year results, with earnings declines of up to 20 per cent predicted for the resources sector by June. Wilson HTM Investment Group senior research analyst Jacqueline Fernley also warned investors to expect widespread dividend cuts as companies attempted to improve their bottom line.

"Prior to the credit crisis, Australian companies in general tended to increase the level of gearing and increase dividend payout ratios," she said.

"Clearly, the corporate deleveraging process is continuing and we expect that permanent reductions in dividends are likely to ensue, as this will prove to be a cheaper form of capital than deeply discounted rights issues."

Research house Morningstar identified Wesfarmers, Commonwealth Bank, Suncorp, Leighton, Transurban, Qantas, AMP, Perpetual, Caltex and Pacific Brands as some of the larger companies at risk of cutting dividends. But Mr Harman said that while the looming reporting season would be one of the toughest to date, the worst was yet to come.

He believes that Australian companies are heading towards earnings per share falls of 20 per cent for the 2009 calendar year -- a level not seen since the 1990-91 recession.

UBS predicts dividends will fall 10 per cent by the end of 2008-09.

"All of the four weeks of reporting we are about to get relate to an earlier time when things were better at the end of calendar 2008 -- none of these results will tell you anything about 2009," Mr Harman said.

"Even if things do settle down and it doesn't turn into a huge disaster, you are still three reporting seasons away from getting the worst of the data."