Earnings season to test market optimists
Analysts tend to agree that Australian stock 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 last month.
However, there is no evidence that listed companies are broadly earning more.
In fact, since the last earnings season in August, there have been 21 profit downgrades among the ASX 200 companies compared with just three upgrades.
The magnitude of the downgrades has also been far greater: scrap metal recycler Sims Metal is the biggest culprit, lowering earnings by 63 per cent, while miner Whitehaven Coal expects a result 44 per cent below original hopes, according to 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 ASX 200, with growth expected to be just 3.0 per cent in 2013, compared with the 13 per cent being forecast a year ago. Credit Suisse says 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 also figure heavily following Rio Tinto's $14 billion hit.
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 chief economist Craig James was also optimistic there might be some positive surprises in the retail sector, following dramatic earnings upgrades by womenswear retailer Specialty Fashion Group and retailer Kathmandu.
Frequently Asked Questions about this Article…
The article says the recent bull run will be severely tested because analysts are pessimistic about earnings season — stock prices have risen sharply but there's no broad evidence companies are actually earning more. That mismatch between high share prices and weak earnings expectations is the key risk for investors.
Australian stocks have rallied about 20% since May last year to 20‑month highs and climbed roughly 6% in the last month. Analysts worry prices may have been pushed too high relative to actual earnings, which raises the chance of market corrections if companies report weak results.
Since the last earnings season in August there have been 21 profit downgrades among ASX 200 companies compared with just three upgrades. Overall the downgrade-to-upgrade ratio is about 2:1 for the ASX 200, signalling weaker earnings momentum.
The article highlights scrap metal recycler Sims Metal cutting earnings by 63% and miner Whitehaven Coal expecting results about 44% below earlier hopes. On the upside, fuel group Caltex recorded the biggest upgrade among the top 200, lifting forecasts by about 20%.
Credit Suisse expects weak growth in more cyclical sectors such as metals & mining and consumer discretionary. The largest share of downgrades has come from mining, and asset write‑downs (like Rio Tinto's reported $14 billion hit) will also weigh. Moderate growth is expected in energy, insurance, media and telcos.
Yes — the article notes a positive side to downgrades: they can reduce the number of unexpected bad results, which lowers the chance of sharp share price falls during earnings announcements.
CommSec chief economist Craig James suggested there could be positive surprises in retail after dramatic earnings upgrades by womenswear retailer Specialty Fashion Group and by Kathmandu, indicating some pockets of strength in the retail sector.
The article points to a weak domestic macro environment over the past six months — including sluggish job growth, weak consumer confidence and soft consumer spending — which together have contributed to lower earnings forecasts.
Call 1300 880 160
Start a chat
Schedule a call
