Markets: A season to be jolly

There were whispers before earnings season of big surprises due on the downside, but the story so far has been the opposite. Not that investors seem to have noticed.

Before earnings seasons kicked off, there were whispers that earnings forecasts could be downgraded by as much as 8 per cent. With those at the big end of town reporting record profit numbers and increasing earnings per share, if anything it has been the exact opposite.

This reporting season we have the ASX continuous disclosure rules to thank for earnings largely falling in line with ongoing guidance. We are almost half way through formalities and there have been few surprises. 

But there is no pleasing investors. Primary was pushed over 2 per cent lower in early trade after closing down 2.8 per cent yesterday. Using estimated future earnings and the current market price has Primary looking expensive at around 15 times earnings, not warranting the current share price.

Primary Health Care (PRY) reported net profit at $150.1 million, an increase of close to 29 per cent from the previous year. Revenue and dividends were also up.

Earnings per share grew by 28 per cent in the last financial year and 25 per cent in the year before. The forecast for this coming year is much more subdued, with earnings expected to grow somewhere between 7 and 13 per cent.

CSL share a similar story. Earnings per share growth are tipped to fall from 23 per cent to around 14 per cent, making them look pricey at around 21 times earnings. They have lost 3.6 per cent since reporting record profit numbers yesterday.

Let’s be really generous and say the consumer price index (CPI) is going to come in at 3 per cent for the next year.  The expected growth for Primary and CSL is still comfortably above this and there are dividends to include too.

The official cash rate is at 2.5 per cent so you definitely aren’t going to get a better return with a term deposit. Maybe investors have turned greedy.

Over the past year the ASX 200 is up just on 20 per cent. Primary is up 45 per cent and CSL 57 per cent. The graph below shows the difference between all three as if you had invested a dollar in each one.

Graph for Markets: A season to be jolly

Growth forecasts for the year ahead mean we won’t see similar share price growth. But keep some perspective – the growth outlook for Australia and much of the developed world is lower than what we have become accustomed to, yet investors are demanding more from their favoured stocks?

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