Reporting season unveils little to excite underwhelmed investors

Corporate earnings are failing to justify the equity market’s elevated levels.

By the numbers

Corporate earnings are failing to justify the equity market’s elevated levels and investors often are unwilling to give even solid numbers the benefit of the doubt.

After having breached the 5500 point level on August 1, the market has retreated on a slew of blue-chip profit results that, while passable, failed to ignite ­investor passion.

Disappointers this week ­include CSL, Domino’s Pizza, AMP and coal carter Aurizon.

In the case of market darlings Domino’s and CSL, management largely met earnings expectations but the outlook statements missed the mark.

Bright spots were Treasury Wine Estates, JB Hi-Fi, Iress, Orora and Ansell (more on ­management’s review of its condoms division). Proving that where there’s muck there’s money, investors yesterday ­lauded Cleanaway Waste Management for turning a previous $24m loss into a $44m profit.

According to Baillieu Holst strategist Mathan Somasun­daram, the broader market ­(excluding financials) trades on a multiple of 20 times current year earnings compared with the long-term average of 13-14 times. The concentrated ­nature of the local bourse accentuated the sell-offs.

“The biggest problem is the market has a huge herd mentality because everyone is in the same stocks, ” Mr Somasun­daram said. “Because of this crowded trade, you will get institutions getting rid of stock because they don’t know how the market will react.’’

They tend to buy back in when the dust has settled.

Palmer & Co principal Malcolm Palmer said 15 companies (the banks, Telstra and the supermarkets) accounted for 65 per cent of the market’s value. “The Australian stockmarket has a significant concentration risk,’’ he said. “As a result, too much money is chasing too few stocks.’’

The insatiable chase for dividends prompted companies such as AMP and Aurizon to maintain payouts in the face of flagging earnings.

According to AMP Capital, 70 per cent of companies reporting so far have raised their dividend while only 8 per cent have taken the knife to distributions.

The latter camp includes LNG developers Santos and Origin ­Energy, which scrapped their payouts completely.

“The clear theme coming out of the large cap names in reporting season thus far is ‘give me yield’,’’ Clime Capital said. The ­results have “generally shown low growth and the maintenance of relatively high payout ratios/­buybacks to deliver a solid yield to investors’’.

Despite the erratic results, ­expectations are little changed since the start of the month as ­analysts plug in a market-wide earnings per share retreat of 8.5 per cent for the 2015-16 year.

This factors in a 50 per cent ­decline for resources, with the industrials (excluding banks) about half a per cent higher.

“My gut feeling is you have seen resources improve a bit, banks doing about the same and the other industrials slightly lower,’’ Mr Somasundaram said.

Despite posting a $8.5bn headline loss, BHP Billiton’s results were well received, if only because of the brighter outlook.

While cautious about the outlook for iron ore, BHP’s most ­important commodity, chief executive Andrew Mackenzie said there was “some sense that prices have stopped falling, as ­opposed to being in free fall’’.

However the gold sector’s Midas touch failed to rub off on Newcrest, the biggest listed miner. The company returned to dividends after three years, but its underlying earnings shrunk 24 per cent to $US323m ($425m).

Aurizon, formerly Queensland Rail, disclosed an expected 88 per cent profit decline, blighted by a $528m write-off of its boom time investment in Aquila Resources.

“However we have seen a stabilisation in coal volumes in the second half,’’ chief executive Lance Hockridge said.

As a packager of fast-moving consumer goods here and in the US, Orora is a bellwether of the “real” economy. The Amcor spin-off’s 28 per cent profit surge was well ­received, despite chief executive Nigel Garrard’s muted outlook remarks. “The outlook for the US is slightly better than the Australian outlook,’’ he said. “But it’s not as bright as what I thought it might have been four or five months ago.’’

Orora’s biggest client, winemaker Treasury Wine Estates, is riding the favourable currency, booming Asian demand and, surprisingly, an improved showing from its lower-priced drops.

JB Hi-Fi powers on as householders fill their rooms with ­plasma screens and laptops. Chief executive Richard Murray says the company is benefiting from its “frugal” credo — and the ­demise of rival Dick Smith.

A victim of the price-to-perfection factor, plasma therapies giant CSL was punished despite forecasting current-year EBITDA growth of 14 per cent.

In the financial sector, Challenger edged profits up 10 per cent to $328m and is enjoying the boom in demand for annuities from a greying population.

Hit by low global interest rates, QBE Insurance was a major disappointer and AMP also hit a bum note, weighed down by shrinking wealth-management flows tied to the government proposed tightening of super contribution rules.