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FYI

Weekly Broker Wrap: Earnings Season May Disappoint
FNArena News - February 04 2013

-Upcoming earnings season uncertain
-Risk with over-optimistic expectations
-Earnings downgrades outweigh upgrades
-Talk of Crown/Echo merger to continue


By Eva Brocklehurst

Know your stocks. The upcoming reporting season is full of uncertainties, according to JP Morgan, perhaps more so than the last. The broker sees potential for just 23% to surprise with better performances, which is close but below the long-term average, and 35% likely to offer downside surprises, again slightly below. A few stocks have excess cash, which may hold out prospect of increased dividend or a stock buy-back, and some are struggling to generate cash flow in the current market. For Credit Suisse, the greatest area of concern is domestic cyclicals as these have seen a re-rating in recent months despite an underlying deteriorating domestic growth profile. Credit Suisse prefers bond proxies such as the Australian real estate investment trusts (REIT), infrastructure and utilities sectors as well as defensive industrials and global industrials. This broker is underweight banks, domestic cyclicals and mining services.

So which are those JP Morgan thinks have excess capital and could launch a new buy-back? Ainsworth (AGI), Amcor ((AMC)), Australian Pipeline ((APA)), Aurizon ((AZJ)), BHP Billiton ((BHP)), Challenger ((CGF)), Coca-Cola Amatil ((CCL)) Domino's Pizza ((DMP)), Flight Centre ((FLT)), Nib Holdings ((NHF)), REA ((REA)), Rio Tinto ((RIO)) and Sims Metal ((SGM)).

Some the broker thinks may need to raise additional equity include Alumina ((AWC)), APN News ((APN)), BlueScope ((BSL)), Oil Search ((OSH)), Crown ((CWN)), Goodman Fielder ((GFF)), Leighton ((LEI)), Lynas ((LYC)), Ramsay Health ((RHC)), Paladin ((PDN)), Southern Cross Media ((SXL)) and Seven West Media ((SWM)).

For UBS, Australian corporates face earnings headwinds, even though the market has rallied in the last six months amid improvements in the global economy. Some important drivers of earnings growth have turned up in recent months, according to this broker. Commodity prices have bounced from September's lows, creating upside for mining sector earnings. As well, the rally in the stock market bodes well for those stocks leveraged to the market, even if fund flow is still not super strong. Nevertheless, the broker sees this reporting season as likely to be a "hand brake"on the rally rather than an "accelerator". 

What are those companies UBS sees offering potential upside surprise? On a quantitative view basis, some with potential upside are Beach Energy ((BPT)), Mirvac ((MGR)), Primary Health ((PRY)), Sonic Health ((SHL)), Tabcorp ((TAH)), Tatts (TTS)). Downside? These are Commonwealth Bank ((CBA)), Goodman Group ((GMG)), Leighton, and Lend Lease ((LLC)). On a fundamental view basis, those that could surprise on the upside are Automotive Holdings ((AHE)), GPT ((GPT)), Insurance Australia ((IAG)), Monadelphous ((MND)), Myer ((MYR)), Super Retail, ((SUL)), Pacific Brands ((PBG)) and Toll ((TOL)). Downside? These could be Bradken ((BKN)), Brambles ((BXB)), Computershare ((CPU)), David Jones ((DJS)), QBE ((QBE)), Santos ((STO)), Stockland ((SGP)) and SMS Management ((SMX)).

Credit Suisse sees significant earnings risk across some sectors because of overly optimistic market expectations and a weak domestic macro environment. Since the last reporting season the broker has reviewed trading updates and production reports for ASX200 stocks and has noted few earnings upgrades. However, earnings downgrades are occurring in cyclical sectors such as metals, mining and industrials. Credit Suisse has identified 21 downgrades, including equity raisings, across its ASX200 coverage up to January 16 2013.

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