With $40b of profits in the bag, the recovery gains momentum
Although the proportion of companies that have beaten expectations for the first half of the 2013 financial year was similar to the last few years, expectations among analysts of future earnings growth had improved.
"For the first time in three years, a majority of companies [54 per cent] are seeing their earnings forecast upgraded," Deutsche Bank's head of equity strategy, Tim Baker, said. Companies including miner Newcrest, retailer JB Hi-Fi, transport group Asciano and Insurance Australia Group were among the big names to come in ahead of the market's expectation of profit. However, among those to disappoint investors were Tabcorp, energy interest Origin and mining services companies Boart Longyear and Drillsearch.
Mr Baker said dividends had come in better than expected. While net profits after tax were fairly flat for the first half of the 2013 financial year, dividends were up 1.3 per cent.
David Cassidy, UBS's head of strategy, said company earnings had so far been fairly steady according to forecasts, with expectations for the year ahead more realistic than they had been previously.
"I don't think we're going to an upgrade cycle, but we look to have passed the downgrades," Mr Cassidy said.
Earnings growth for the industrial sector picked up, but was driven by so-called defensive companies such as telecommunications and those operating healthcare, while cyclicals - companies that are dependent on the ups and downs of the economy - remained stagnant, Mr Baker noted.
The main disappointments have been second-tier resources stocks, which were less able or willing to cut costs like their bigger counterparts, and mining services companies, which have been hit by their clients' cost-cutting, Deutsche Bank's head of research sales, Glenn Morgan, said.
Mr Cassidy said the markets were starting to price in stabilisation or a potential turnaround for stocks in a range of sectors such as discretionary retail and steel.
"Quite a lot of the domestic cyclical sectors are starting to rally. I don't know if the market is going into an upturn, but the fact that earnings looked to have based out has been enough to see a lot of these share prices jump given how cheap they were," he said.
While the broader market is tipping double digit growth in profit for corporate Australia, Nomura strategist David Jennings was more bearish over the outlook.
He was tipping earnings expectations for the 2014 financial year were likely to fall as they have in previous years.
"Expectations were low coming into the reporting season, so it's not been surprising that we've seen some beats," Mr Jennings said.
"Our take away from this reporting season is that we are not at the beginning of an upgrade, but rather this is a bit of a breather and reality is going to have to bite pretty soon," Mr Jennings said.
"We're still looking for the market to fall back from these levels by the end of the year."
Corporate chiefs generally sounded a cautiously optimistic note over the health of the economy.
Commonwealth Bank chief Ian Narev said that while risks remained in the economy, if the current stability continued this would translate into a "slow but steady rebuilding of consumer and business confidence".
Frequently Asked Questions about this Article…
The article says the earnings season is winding down and suggests the worst of the global financial crisis may be over for much of corporate Australia. Nearly $40 billion of profits were handed down over the past month, and signs point to a recovery in earnings gaining momentum.
Companies that came in ahead of market profit expectations included Newcrest, JB Hi‑Fi, Asciano and Insurance Australia Group. Those that disappointed investors included Tabcorp, Origin and mining services/mining‑exposed names such as Boart Longyear and Drillsearch.
For the first time in three years a majority — about 54% of companies — saw their earnings forecasts upgraded. That matters because upgraded forecasts can signal improving analyst sentiment and may indicate that corporate earnings are stabilising or starting to recover.
The article notes that while net profits after tax were fairly flat for the first half of the 2013 financial year, dividends were slightly higher — up about 1.3%. That suggests companies were able to maintain or modestly lift payouts despite subdued profit growth.
Earnings growth in the industrial sector picked up but was driven mainly by defensive industries such as telecommunications and healthcare. Cyclical sectors — companies tied closely to the economic cycle — remained largely stagnant. Second‑tier resources and mining services were the main disappointments.
Analysts were mixed. Deutsche Bank and UBS strategists noted upgrades and signs that downgrades may have passed, with some market stabilisation priced in for sectors like discretionary retail and steel. By contrast, Nomura's strategist cautioned this may be a short breather rather than the start of a sustained upgrade cycle and warned earnings expectations for the 2014 financial year could fall.
Yes — the article says markets have started to price in stabilisation and a potential turnaround for some sectors. Domestic cyclical sectors such as discretionary retail and steel have begun to rally, partly because earnings look to have bottomed and valuations were perceived as cheap.
Corporate leaders were cautiously optimistic. Commonwealth Bank chief Ian Narev said that if current stability continues it could translate into a 'slow but steady rebuilding of consumer and business confidence,' though he also noted economic risks remain.
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