Australian corporate earnings – Low expectations, high hopes

The earnings season is a tale of the past. Investors are looking for a brighter 2014.

‘Tis the season to be jolly? Perhaps not.

With the earnings reporting season about to kick into gear next week, the mood on the Australian market is somewhat less than exuberant.

Expectations have cooled during the past six months when it was hoped the 2013 financial year would deliver a 3% earnings growth, jumping to 6.5% if resources are excluded.

Now, consensus is for a flat result overall with 3% growth excluding resources.

Lower expectations can be beneficial. If nothing special is anticipated, there is a greater chance of even ordinary results to buoy the market.

The current American earnings season provides a perfect example. Now at the halfway mark, 74% of earnings have beaten consensus estimates while 57% of sales have outpaced expectations which has helped drive Wall Street in recent weeks. Financials in particular have provided pleasant surprises.

Dividend growth rather than bottom line earnings has been the dominant driving factor behind the Australian market in the past year. And that remains the focus for many investors, given dividends have grown 8% during the past year.

Optimism about 2014, however, abounds.  Despite recent volatility and the reticence of many corporate chiefs to stick their necks out with earnings guidance, consensus earnings growth for the new financial year currently stands at 13.6% (see The value vault: our picks).

Rather than being a drag on profits as has been the case for the past two years, resources are expected to underpin 2014 profit growth.

Removing resources from the picture, earnings in the year ahead are anticipated at 8.8%.

That is more bullish than six months ago when an overall lift of 11.5% was expected, dropping to 7.4% when resources are excluded.

The major force behind the anticipated growth is the currency following its 12% drop in May and June. There is no doubt it will provide an immediate boost to earnings, particularly for exporters and companies with foreign divisions and for import competing industries.

But it will take several years of sustained currency weakness for the full benefits to flow through. You can mothball a manufacturing plant overnight. Building one from scratch takes considerably longer.

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