Downgrades signal challenge to share prices' great run
Analysts tend to agree that Australian share prices have been pushed up too high, having rallied 20 per cent since May last year to 20-month highs and 6 per cent in the past month.
However, there is no evidence that listed companies are broadly earning more. Since the last earnings season in August, there have been 21 profit downgrades among the ASX200 companies compared with three upgrades.
The magnitude of the downgrades has also been far greater: scrap metal recycler Sims Metal is the biggest culprit, reducing earnings by 63 per cent, while miner Whitehaven Coal expects a result 44 per cent below original hopes, according to the Patersons Securities quantitative analyst Kien Trinh.
The biggest upgrade among the top 200 companies is fuel group Caltex, which lifted forecasts by 20 per cent. The downgrades, combined with a weak macro environment in the past six months, especially domestically where job growth, consumer confidence and spending are weak, point to weak earnings.
The ratio of analyst downgrades to upgrades is 2:1 for the ASX200, with growth expected to be 3 per cent in 2013, compared with the 13 per cent being forecast a year ago.
Credit Suisse says very weak growth is expected for the more cyclical metals and mining and consumer discretionary sectors.
The largest proportion in downgrades has come from mining, while asset write-downs will figure heavily after Rio Tinto’s $14 billion hit, meaning it will post a statutory loss .
The positive thing about downgrades is that they mean fewer surprises and less chance of share prices falling during the earnings period.
Moderate growth is expected in energy, insurance, media and telcos.
CommSec’s chief economist, Craig James, was optimistic there may be positive surprises in the retail sector, following dramatic earnings upgrades by womenswear retailer Specialty Fashion Group and adventure wear retailer Kathmandu.
Frequently Asked Questions about this Article…
Analysts note Australian shares have rallied about 20% since May last year to 20-month highs, yet there’s no broad evidence of higher company earnings. With more downward earnings revisions than upgrades, many analysts think prices may have run ahead of fundamentals, increasing the risk the market will be tested during the upcoming earnings season.
Since the last earnings season in August, the article reports 21 profit downgrades among ASX200 companies compared with just three upgrades, indicating a clear skew toward lower analyst expectations.
The biggest downgrades named were Sims Metal (a scrap metal recycler), which cut earnings by about 63%, and Whitehaven Coal (a miner), which expects results about 44% below earlier hopes. The largest upgrade among the top 200 was fuel group Caltex, which lifted forecasts by roughly 20%.
The article says mining accounts for the largest share of downgrades and that Credit Suisse expects very weak growth for cyclical metals and mining. For investors, this highlights sector-specific risk: miners may face downside from poor commodity conditions and asset write-downs, so investors should be aware mining earnings look particularly challenged.
The article points out a positive angle: when companies downgrade earlier, there tend to be fewer surprises at results time, which can reduce the chance of sharp share price falls during the earnings season. In other words, pre-announcements can temper volatility caused by unexpected bad news.
Credit Suisse is cited as expecting very weak growth in more cyclical sectors such as metals, mining and consumer discretionary. Moderate growth is anticipated in energy, insurance, media and telecommunications.
The article says Rio Tinto took about a $14 billion hit in asset write-downs, which will cause it to post a statutory loss. That kind of large write-down contributes to the overall picture of downgrades and weaker reported earnings in the mining sector.
Yes. CommSec’s chief economist Craig James was optimistic that the retail sector could produce positive surprises, citing recent dramatic earnings upgrades for womenswear retailer Specialty Fashion Group and adventure-wear retailer Kathmandu as encouraging signs.
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