Australia’s listed companies about to kick off the earnings season – that is, issue their financial results for either the 2009 calendar year or six months to December.
On Wednesday, Coal & Allied and GUD Holdings kick off the season with their earnings results. On Thursday, Newcrest Mining, Aquarius Platinum and Alesco issue their results. And on Friday, Fortescue Metals, Beach Energy, Navitas and Energy Resources issue their profit figures.
So what can we expect? Well, given that major companies have been markedly increasing the amount of information provided to investors over the years – especially by way of quarterly updates – there is much less focus on the actual results. Earnings season has always been about future guidance and that is even more so now. And the constant flow of information also serves to scale down the importance of the formal earnings report.
The good news is that the “confessional period” ahead of earnings season has been generally positive. Computershare, Flight Centre and Commonwealth Bank have upgraded earnings guidance while Harvey Norman issued upbeat, albeit non-specific guidance. But on the other side of the equation, Worley Parsons stood out in cutting earnings guidance.
For companies reporting full year results, 2009 was clearly a tough year, especially for construction and engineering sectors. Companies continued to delay, mothball or cancel projects in the first half of the year, affecting activity over the second half. And 2009 was especially tough for all companies reliant on overseas markets. Domestic-focussed companies were far more insulated, especially those focussed on consumer spending. But the area to watch is margins, especially in the second half of the year.
The bulk of companies will issue interim figures – results for the six months to December. And again there will be a significant distinction between domestic and globally-focussed companies. By and large the Australian economy was well into its upturn phase but most other countries were bottoming. Earnings at non-mining globally-dependent companies will also be detrimentally affected by a sharply higher dollar – an influence that will restrain earnings in the current half year.
Financial companies, especially diversified financials, will post stellar results for the December half-year, riding the back of stronger global share markets. While retailers will post firm growth in sales, discounting was rife over the period, resulting in more modest gains in earnings. Consumer-focussed companies will probably overwork the phrase “cautious optimism” when expressing views for the next four to six months. By contrast, construction, engineering and business-dependent firms will report weak results for the December half but express much greater confidence about 2010 prospects.
Overall, companies won’t pay the price if earnings disappoint unless guidance is similarly depressing.
If there is one topic that stands out in the coming week its inflation. Figures on business inflation (producer prices) are released on Monday while the main measure of economy-wide inflation – the consumer price index (CPI) – is issued on Wednesday.
The key influences on inflation in the December quarter were slightly lower commodity prices (petrol down 3.2%), a firmer Aussie dollar, and continued softness in rents. Discounting by retailers also would have restrained consumer prices over the quarter.
Overall we expect that producer prices rose by around 0.5% in the December quarter, cutting the annual rate of business inflation from 0.2% to -0.6%. A 9.6% average lift in the Aussie dollar against the greenback over the quarter would have acted to restrain import prices, partially offset by a 4% lift in the Singapore gasoline price.
In terms of the CPI, we expect that prices grew by around 0.7% in the December quarter following the 1.0% rise in the September quarter. But the annual headline rate of inflation is forecast to rise from a decade low of 1.3%, to 2.3% in the December quarter – a result that will see the ‘headline’ or published rate of inflation back inside the Reserve Bank’s 2-3% target band. The simple reason is that the CPI actually fell 0.3% in December quarter 2008 in response to lower petrol prices and that low result now ‘drops out’ of the annual inflation rate calculation.
Given the weight the Reserve Bank put on ‘underlying’ inflation measures, the trimmed and weighted mean will draw a lot more interest. An average of both measures is likely to see “underlying” inflation rise by 0.8% in the December quarter with the annual measure falling from 3.6% to 3.5%. If underlying inflation measures continue to rise by 0.8% or more a quarter, then clearly the annual rate won’t fall back into the 2-3% band – and that’s a concern for the Reserve Bank.
Also on the domestic agenda in the coming week are private sector credit and the RP Data/Rismark home price series, both slated for release on Friday. Overall we think that private sector credit grew by 0.1% in December to stand 1.2% higher than a year ago.
In the US, data on existing home sales and the Dallas Fed manufacturing index are released on Monday. The house price index, consumer confidence and Richmond Fed manufacturing index are slated for release on Tuesday. The Federal Reserve interest rate decision will be handed down will be handed down on Wednesday along with new home sales. On Thursday durable goods orders and jobless claims data is issued. Closing out the week on Friday will be the advance reading on GDP (economic growth) and personal consumption.
Modest gains are expected in new home sales, durable goods orders and consumer confidence, while existing home sales are likely to have fallen by around 7%. But the main focus will be on the GDP reading. Analysts expect that the US economy grew at a solid 4.3% annual rate in the December quarter.
The US profit-reporting season moves into top gear with over 440 companies to issue results in the coming week. Amongst companies reporting on Monday are Apple and Texas Instruments. DuPont, Johnson & Johnson, US Steel, Boeing, Caterpillar, E*TRADE and Sun Microsystems all release earnings on Tuesday. Results are expected from AT&T, AstraZeneca, Baxter, Motorola, Potash, Amazon.com, and Microsoft on Thursday. And on Friday, Chevon and Honeywell are expected to report.
The Reserve Bank meets in a fortnight’s time and it’s probably opportune to have a look at financial market pricing on another rate hike – especially ahead of the inflation data released in coming days. At the start of January financial markets were pricing in a 50% chance of a 25 basis point rate hike. But following last week’s better-than-expected employment data, and the recent rebound in consumer confidence, the probability of a rate hike has jumped to 75%. CommSec believes the pricing is about right, and we would expect this probability to lift appreciably if the inflation figures in the coming week are at the high end of expectations.
The key issue that is currently affecting commodity and currency markets is the state of the Chinese economy. It is understandable that analysts are fretting over a potential boom/bust, but just like Australia’s Reserve Bank, the policymakers in China have got the runs on the board. The Chinese economy absorbed the shock of the US financial crisis, but more importantly it was able to quickly rebound back to pre-crisis levels. The fact that China has started tightening policy much earlier than expected is re-assuring.
But also note that frenetic activity is occurring in Shanghai to get sites ready for the huge World Expo beginning in May. While officials note: “construction of most pavilions is almost complete”, there are additional issues such as transport and accommodation to cater for the huge inflow of visitors. Organisers estimate that 70 million visitors are expected to visit the Expo over the six months through to the end of October. And then there are the logistics with 192 nations and 50 international organizations to participate in the Expo.
Craig James is chief economist at CommSec
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
