Recording increasing profits or profits in line with earlier guidance isn’t enough to keep investors happy this reporting season. Management comments about future economic conditions are over ruling, pushing stocks into the red. Today, CSL Limited (CSL) Leighton Holdings and STW Communications can all attest to this.
In the case of CSL, despite posting a profit of $US1.216 billion, a 21 per cent increase on the previous year they have been pushed down over 3 per cent today.
Earnings per share increased at 24 per cent for the period, allowing CSL scope to increase the final dividend to 52 cents. With many companies before CSL citing weaker economic conditions lie ahead, this should be more than enough to encourage positive investor sentiment.
All the numbers CSL reported show they are still experiencing growth, despite global economic conditions remaining weak.
It was comments from Chief Executive Officer Paul Perreault that got the market going in the wrong direction. He sees the outlook for 2014 being tempered again by continuing economic pressures. CSL forecast research and development spending will eclipse profit growth as existing products approach commercialisation.
The 3 per cent drop seems harsh. Earnings per share growth is still tipped to be greater than profit growth expectations. If we do enter a period of low growth, you want companies that have the ability to continue to grow earnings, year after year.
The market and investors should be focusing on the ability of CSL to grow earnings per share as opposed to the economic environment they will have to endure. The consensus is that economic conditions are weak and all companies are affected, some more than others.
Leighton Holdings Ltd (LEI) is also experiencing a similar fate. Reporting for the half year, they advised they are on track to meet their full year earnings guidance. This was pleasing, especially after they detailed a net reduction in contract mining work to the tune of $3.7 billion, a 20 per cent reduction on expectations.
Upbeat commentary from management about the economic outlook hasn’t been enough to overcome the actual reality of significantly reduced dollar value of contracts. Given Leighton’s history for lack of transparency, you would have to sympathise with the market on this one. They didn’t see a 20 per cent reduction in mining contracts for no reason and the economic conditions that brought this aren’t going to change immediately.
Also reporting half year result today was advertising and digital agency, STW Communications. Net profit after tax was strong, up 7.2 per cent. But with a slower growth forecast, they have fallen over 2 per cent today.
Specifically, growth is not expected to be better than CPI for the next 1 – 3 years. STW Communications has previously delivered earnings per share compound at an annual growth rate of over 13 per cent since 2009 and investors will have to accept less moving forward. For the half year, earnings per share fell to 4.68 cents from 5.05 cents.
Also weighing on our local advertising giant is a falling Australian dollar and cautious consumers, not to mention the merger between two global advertising agents, Publicis and Omnicom.
Reporting season offers the perfect time to gain insight into management thoughts, but it is important to look at these comments in conjunction with historical performance – both of management and financials.