Reporting season worst in four years

THE financial reporting season has been a mixed and messy affair, with companies missing targets and being pessimistic about the future.

A SNAPSHOT of company results from the latest reporting season. /NEWS.com.au

Reporting season worst in four years

THE financial reporting season has been a mixed and messy affair, with more companies missing targets and showing pessimism about the future.

Shane Oliver, chief economist at AMP Capital Investors, said this reporting season has been the worst we’ve seen in four years.

He said the average profit growth rate came in around 7 or 8 per cent for the year ended December 2007, down from a 19 per cent growth rate the previous year.

Just 29 per cent of companies met the market’s profit expectations. The number of companies to report results that disappointed the market swelled to about 33 per cent, up from 21 per cent. Just 38 per cent of companies reported results that exceeded the market’s expectations – down from an average of 52 per cent over the previous four years.

Debt averse
Lucinda Chan, division director at Macquarie Private Wealth said financial stocks had fared worse than non-financial stocks as wary investors assessed the damage from the global credit crunch.

Investors are shying away from companies that are carrying a lot of debt.

“The main theme that came out of this season was cost increases – lending costs, rising interest rates.  Many companies are struggling to maintain their operating margins and that’s been across the board. Debt costs continue to be a serious issue,” Ms Chan said.

She said investors seemed to be suffering a crisis of confidence, and were looking to park their money with non-financial companies that have a low-geared balance sheet, sustainable debt, strong cash flow and a confident management team.

Looking forward
Investors’ confidence has been hit hard by sharemarket losses so far this year.  Sentiment won't be improved by the more pessimistic tone many companies have adopted in their outlook statements for the rest of the year.

Dr Oliver said that last year 12 companies issued positive outlook statements for every one company that had a negative outlook. This year the ratio has fallen to just 1.5 positive outlooks for every negative one.

“So it’s come right back down. Companies are either not saying anything, or are coming out with more cautious comments,” Dr Oliver said.

Market turbulence
Dr Oliver said market volatility is likely to continue until at least the middle of the year as the bears – who think the market is about to tank - and bulls – who are confident the market will rise - battle it out.

“Bears think the sky is falling in, the US economy is about to collapse, that the Reserve Bank is going to too far on interest rates. All those things are certainly risks and I think the economic data in the short term will have a bearish tone to it. But the bulls can point to attractive valuations, the US Fed cutting interest rates and strong growth in emerging markets.”

Dr Oliver said by mid-year the market should stage a recovery, as the US Federal Reserve’s rate cuts free up some cash for investments.

In the meantime he said investors should look to companies with good fundamentals.

“The trick is to find stocks that have a fairly secure earnings stream, management’s fairly confident about the future, there’s not a lot of gearing and the valuations are reasonable.”