As the market has continued its convincing climb higher, news headlines have been dominated by the extremes of performance.
Things are not what they seem
Although QBE Insurance Group racked up its third serious downgrade in the same number of years, it hasn’t been the worst performing insurer for the year – AMP Ltd takes this crown. AMP has been unable to recover from its June earnings revision and continues to find lower ground as the market accepts the reality that further problems may lie ahead from the company that has promised so much but delivered little post-merger with AXA.
While the Big Four banks are known as investor favourites, they have been blitzed by the Bank of Queensland. Admittedly, the Queensland bank was recovering from a treacherous two years, but it is an impressive performance from a bank flying under investors' radar.
Despite Newcrest Mining Ltd denying it broke any disclosure rules in June, some investors remain suspicious about the disclosure. As production costs rise and the liquidity of the balance sheet comes into question, the falling gold price isn’t helping the miner. As a result, further cost cutting or asset sales will likely be required to stop the cash bleed to keep the balance sheet manageable.
In only three years, Newcrest has lost over 80 per cent of its market cap compared with a flat gold spot price in Aussie dollars.
Treasury Wine Estates is also under fire for an alleged breach of continuous disclosure concerning its US inventories. The severity of the potential breach has sparked a class action against the company. A $160 million writedown of US wine deemed poor and unwanted slashed 12 per cent from its share price and led to the departure of chief executive David Dearie.
Costs didn’t stop at the writedown, with Treasury pouring a further $35 million down the drain to have third party destruction agents destroy the excess wine. No doubt investors would have preferred a more cost-effective means to banish the wine.
While the end of 2013 has been equally rich in earnings downgrades and initial public offerings, earnings revisions have been a consistent feature of news headlines throughout the year.
The first of two earnings revisions for Coca-Cola Amatil came in May, and the second in November. Since the May trading update, Coca-Cola has lost 18 per cent of its market cap, as a market share fight with rival Pepsi (owned by Asahi) took hold and Indonesian operations struggled. A turnaround could be on the way following the appointment of Alison Watkins as chief executive from March 2014.
In June, Cochlear announced net profit was on the slide as sales slowed due to continued pressure from other cochlear implant device makers. Cochlear is set to end the year down 28 per cent.
Less than six weeks after its annual general meeting, WorleyParsons Ltd blindsided the market in late November with its second earnings revision for the year by lowering profit expectations for the full year by some five to 25 per cent.
QBE can comfortably sport the ‘serial downgrader’ moniker after its December shocker, slashing 22 per cent from the share price in a single day. The severity of the downgrade was not lost on the board – in a move to essentially keep chief executive John Neal out of investors’ firing line, chairwoman Belinda Hutchinson stepped down.
A battle for market share and low passenger numbers led to a terrible November for Qantas, forcing the company to announce it would post a loss of $250 to $300 million in the first half of this financial year. The battle with Virgin is far from over and Qantas is at risk of further earning revisions if it continues with its current strategy.
McMillan Shakespeare and GrainCorp shareholders will be lamenting government decisions for some time to come.
Kevin Rudd’s proposal to abolish the Fringe Benefit Tax slashed McMillan’s share price in half in a single day of trade. A change of government and reversal of Rudd’s proposal has seen the McMillan share price recover only modestly.
A staggering 27 per cent was wiped from GrainCorp’s share price when Joe Hockey decided to block Archer Daniels Midland’s proposed takeover of the company. The future of GrainCorp and the Australian agriculture industry isn’t as promising given the proposed spending by Archer Daniels Midland would have been beneficial to the industry in general.
Retailers Kathmandu and Domino’s Pizza have defied tepid market conditions to deliver the goods for investors.
After weathering an unusually warm winter in Australia and New Zealand, Kathmandu continued to hike towards a share price gain of 100 per cent for this year alone. Store openings, spurring sales growth increases and a reduction in cost of doing business, led to a healthy profit for the full year, beating analyst expectations.
Domino’s edged closer to being a global brand after acquiring a 75 per cent interest in Domino’s Japan during the year. The 48 per cent share price gain was fuelled by sales increases and store openings.
This year has proved that niche retailers are better suited to a tepid retail environment by having a specialty area of focus. Major department stores continue to struggle in anl environment dominated by discounting, increased competition and cheaper alternatives. Myer and David Jones have only gained around 25 per cent for the year.
Something for 2014
Ageing demographics in the Western world have boosted the demand for improvements in biotechnology and genomics, leaving plenty of opportunity for companies operating across this space to get quality products or solutions to the market.
The Australian market is scant for opportunities relative to what is on offer globally but Sirtex Medical and Mesoblast are ways to gain exposure to the improvements in science. Neuren Pharmaceuticals is much smaller but looks to have exciting prospects.