|Summary: The current corporate reporting season is about one-third of the way through, and based on results lodged to date earnings are well on track to meet the consensus forecast for 7-9% growth. Debt levels are at decade lows, cash balances are high and debt servicing is at its lowest in at least 14 years.|
|Key take-out: With nominal GDP currently running at just under a 5%, the latest consensus earnings figure confirms that the corporate sector is running ahead of the broader economy.|
|Key beneficiaries: General investors. Category: Shares.|
Today – August 18 – we are around one-third the way through the August reporting season, which is long enough to get sense of how our listed stocks are travelling.
So far it doesn’t appear too bad. In fact it’s good. Recall that there was a great deal of trepidation going into this earnings season, many argued that a weak and fragile economy would result in disappointing earnings – which of course meant that our market was overvalued. That hasn’t proved to be the case.
Coming into reporting season, the consensus was for earnings to rise by around 7-9% and so far that expectation is on track – we would have to see some fairly serious disappointments for that momentum to dwindle. Now this is a very healthy result and it carries with it important implications.
- The All Ordinaries is not overvalued. That’s not to say the market is necessarily cheap, but it’s not expensive. More to the point and as I have argued before, traditional notions of value aren’t really all that useful for investors in a ultra-low interest rate world. In a world of rampant asset price inflation, there is every reason to expect average price to earnings ratios to be much higher from what we have experienced in the past. If that is the case, and I believe it is, then the market is still very cheap. More so given that earnings momentum.
- Secondly, with nominal GDP currently running at just under a 5%, this latest earnings figure confirms that the corporate sector is running ahead of the broader economy. Now this is clearly a key support for the economy – it’s a good outcome. It will support incomes growth, which in turn then feeds directly into GDP. It shows that an excessive focus on the ‘end of the mining boom’ narrative is going to cost investors money. The economy is much broader than that as this reporting season shows. For the government, good earnings will support tax revenues and all of this is going to be supportive of jobs growth. Especially in a low wage environment.
More broadly, company balance sheets are pristine – debt levels are at decade lows, cash balances are high and debt servicing at its lowest in at least 14 years (see chart 1 below).
All in all, there is still a lot of pessimism around, but earnings results so far are instead highlighting that our large corporates and the economy more broadly still enjoys solid momentum.
Telstra’s results beat analysts’ forecasts with a 14.3% lift in net profit to $4.28 billion, which was well received by the market. The stock rising 2.8% so far after reporting to a 12-year high. Telstra also announced a $1 billion share buyback and lifted its dividend to 15c from 14.5c (29.5c full year).
Commonwealth Bank: Many investors have become highly nervous about our big banks again while a growing number are pessimistic about future earnings, that didn’t stop CBA reporting a strong result. Australia’s largest bank, CBA reported a cash profit of $8.68 billion. That may have been in line with expectations, but it was still a 12% year-on-year increase. Investors would also have enjoyed the 10% lift in the dividend payout to $4.01. All in all a very strong result and the stock is up around 2% for the week. Similarly ANZ reported cash earnings of $5.2 billion in the third quarter, 8% higher than the previous corresponding period. NAB had a more mixed result. Cash earnings were up 7% for the quarter, yet this was on revenues that fell 1%.
Rio Tinto reported interim earnings 21%higher than last year, with that result nearly 12% above the consensus expectation. The interim dividend was increased 15% to 96 cents per share, with further plans to return cash to shareholders.
CSL reported full-year net profit up 7.8% with revenue up 7.7% (8.6% constant currency) which the market clearly liked as the stock is up 10% over the week. Like Telstra, CSL is planning a $950 million buyback.
Crown Resorts reported a 35.2% lift in underlying profit to $646 million, which was over 4% above the consensus. After reporting the stock rose 5%.
QBE: On July 29 the hapless insurer announced another profit downgrade. QBE said it expected to report an interim profit after tax of $US390m for the first half of 2014 sharply lower than the $US447 million recorded in the first half of 2013. QBE suggested the bottom line was hit by compensation claims in Argentina and declining margins. Investor's responded by selling the stock down 11%, with little in the way of a recovery since that profit warning.
James Hardie reported an 80% fall in first quarter profit (to June 30)and while much of this reflected ‘unfavourable’ asbestos adjustments of $21m versus a $90 million favourable adjustment last year adjusted net profit, excluding that, was still down 4%. It’s not all bad news, revenues were up 12% showing that the company is in the right space but is finding it hard to capitalise on that.
JB-Hi-Fi may have reported a 10.3% lift in after profit tax, same-store sales dropped 5.5% with top-line sales reported to rise 3.4% this year which is about half the consensus forecast. On a same-store basis, that would equate to a drop in sales of about 1%. After earnings reported, the stock slumped nearly 8% a further 2% being lost in subsequent trading.
To conclude then, this earnings season is shaping up to be a good one notwithstanding some high profile disappointments. Strong results from our banks are especially important. Banks are the bellwether stocks for this cycle. It’s interesting also that 65% of the companies who have reported to date have increased their dividend.
The Reserve Bank and other central banks have driven rates to generational lows: The lowest on record in some cases. Poor earnings from banks would indicate that monetary policy is broken, that it doesn’t work…instead we’ve had the opposite indication monetary policy is working.