Let the results be your guide.
You don’t have to tune into the nightly finance report to hear that the economy is in the midst of a strong recovery; there are signs of growing business and consumer confidence everywhere.
People are shopping in droves, buying property irrespective of government incentives and flatscreen tv sales are still ticking over nicely.
Retail sales data shows signs of the pick up; albeit not quite as strong as it was a year ago on the back of the Federal Government’s stimulus payments but still pretty solid.
The labour market seems to be on the mend with the unemployment rate, at 5.5%, showing signs of topping out.
On top of that, the All Ordinaries gained 33 per cent last year in its strongest performance in 16 years.
Recent earnings upgrades from big companies such as Commonwealth Bank and Qantas, as well as a strong fourth-quarter production report from miner Rio Tinto ahead of its full-year results in March, have added to the belief that the worst is behind us.
Focus on Earnings
As the 2010 reporting season begins, the focus will be on which companies will be able to achieve the greatest earnings uplift.
While last reporting season was all about recapitalisation and preserving cash, the feeling in 2010, is that we’ll see a turn around from the extreme weakness and slump in profits that occurred in 2008 and 2009, to a more positive yet mixed result.
AMP Capital’s Chief Economist Shane Oliver said that in 2010 he expects a transition away from the very weak period of profits to strength.
‘I’m looking for profits growth in Australia of around 20%. For the reporting season we’re entering now, I’d see profit growth of around 5%.
‘Some companies will still be reporting negatives and some will be seeing positives and I think the company outlook comments will generally be positive, reflecting the pick up both in Australia and globally,’ Oliver said.
Cyclicals over Defensives
The sectors that are likely to be at the forefront of earnings growth are mainly cyclical; so keep an eye on resources, transport, media and consumer discretionary and industrials.
Strength is also expected in the banking sector as it was one of the hardest hit through the whole crisis.
On the whole, Australian companies have been quite aggressive in cutting costs and that is likely to be a supporting factor in profits through the December half of last year and coming into early this year.
As the year progresses however investors will need to look for signs that revenue growth is gaining traction. ‘I suspect that cost cutting will still be a factor but as we proceed through the year you’d want to see more signs of revenue surprising to the upside and starting to grow,’ Oliver said.
By the time we get to the August 2010 reporting period, the expectation is that the bulk of the companies will report gains and profit growth will be quite solid.
Generally positive results expected
Most analysts are tipping that companies will probably surprise on the upside and it will be interesting to see how Australian investors react.
In the United States, the current reporting season has seen about 80% of companies surprise on the upside. But don’t assume positive earnings will translate necessarily translate into a higher stock price.
Apple (NASDAQ:AAPPL) recently announced second quarter 2010 revenue above expectations but that didn’t help the stock. The same applies here too.
Shane Oliver believes the response could be mixed. ‘Because the share prices have come down in recent weeks expectations are lower. This means that upside surprises might get treated more positively and companies with as downside surprises not as harshly, however they can still be expected to fall.’
The two key things to look out for this reporting season are the outlook statements and their profits. Outlook statements should provide the details on revenue and the strength of or pick up or that revenue.
Profits need to be higher than for the previous period and based on higher revenues rather than simply cost cutting.
Bianca Hartge is a financial journalist for the Finance News Network in Sydney.
