Across our universe of research coverage, 94 out of 250 companies of interest have now reported or guided to their August financial results. The average price reaction of -0.5 per cent reflects the average earnings revision of -1.0pc. While there have been some notable disappointing results from well known companies, we don't see this as a signal that the improving earnings trends this year are going to reverse. Rather, we think it's more likely that expectations have been re-based.
The negative price reactions and downgrades have been unsurprisingly concentrated in the consumer side of the economy, industrials and the challenging telecommunications sector. Sectors that have delivered steady, if not unspectacular results have again been preferred by investors – banks and utility/infrastructure stocks being good examples.
It's been difficult to forecast price reactions but we make some points about the recent results.
- Results that have missed have been concentrated in expensive and/or higher risk companies – such stocks include Dominco’s Pizza, REA Group and QBE Insurance.
- Positive economic data is yet to translate into cyclical tailwinds.
- Weakness in quality stocks is providing opportunities in some of our preferred names – CSL Limited, Suncorp being some examples.
- The market is still willing to selectively reward highly priced stocks on the back of strong results - Carsales and Cochlear are two noted stocks.
- Companies re-investing to grow and protect key markets with Telstra, CSL and JB Hi-Fi being some examples.
- Bank reports have shown that asset quality remains strong, margin trends are improving and the concern over large capital raisings is now out of the way.
- Small cap stocks continue to underwhelm the market vs larger cap stocks. On the whole small cap stocks positive surprises remain elusive.
Questions around the resilience of the domestic economic recovery outside of resources remain unanswered. However, if some of the recent strength in business confidence manifests itself into company earnings and outlook statements, this will go some way to alleviating investors’ concerns.
The rising cost of energy, higher Australian dollar, out-of-cycle interest rates increases and subdued consumer sector continue to cloud the picture.
Noteworthy larger cap stocks reporting this week which will be of interest include Brambles, Amcor, BHP Billiton, Sydney Airports, Healthscope, Coca-Cola Amatil, Qube Logistics, Oil Search and Medibank.
- Justin Still, Investment Adviser (Authorised Representative: 000279726), Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410