Warning for poor earnings performers

Monetary policy easing will fuel some nice surprises in the earnings season but poor performers will be hit, analysts say.

Monetary policy easing will fuel some nice surprises in the upcoming earnings season but will also be a catalyst for potential share price falls if results disappoint investors, analysts say.

In a briefing ahead of the local half-year earnings season, Citi retail analyst Craig Woolford said retailers and building stocks were best poised to present strong results as the effect of Reserve Bank rate cuts trickled through and economic activity rebounded.

“While the low-interest rate environment is likely to have quite tangible benefits for sectors that typically have high levels of debt, such as infrastructure and property, we are already seeing turning points in other sectors where the interest rate has a flow-on effect, in areas such as housing starts and retail spending,” he said.

The brokerage is particularly optimistic on building companies with US exposure, citing James Hardie and Brickworks as two key picks for a positive surprise this season. But companies which disappointed investors would fall heavily on the sharemarket, Mr Woolford added, pointing to the more than 20 per cent drop in both Treasury Wines and Nearmap last week.

“Given stocks are priced to perfection, anything that is read as a signal of weaker momentum puts vulnerability on stocks,” he said.

“Most companies are inclined to give an outlook statement or at least a trading update on how they are looking for January.

“ If there is any deviation from market expectations there is a risk that stocks de-rate because of the price to equity multiples they are trading at.”

Going into interim earnings season, the local market is trading at a price-to-earnings ratio of roughly 18 times, despite slipping slightly last week amid worries over the implications of the new coronavirus. Historically, the market is still at its highest valuations on record, despite what Citi described as a “tumultuous” start to the year.

Following the catastrophic bushfires and spread of the coronavirus, Citi said a distortion in retail data was likely as many people spent money closer to home rather than in key holiday reasons. But he said that was unlikely to cause a retail “strike out”.

Mr Woolford said the key would be in how retail companies communicated their outlook, with expectations for “terminology like green shoots or more positive commentary looking to the second half period”.

Citi is forecasting retail sales growth in 2019-20 to edge higher by 3.5-4 per cent — up from 3 per cent in the 2019 financial year — and expects outperformance from electronics retailers such as JB Hi-Fi and Harvey Norman.

Large format retailers, including supermarket giants Coles and Woolworths, were tipped to be the biggest beneficiaries from a significant upturn in retail performance through the year, while the under pressure clothing sector was likely to underperform.

While Black Friday sales have been blamed for taking sales growth away from the key December period, Mr Woolford argued that the sales days had instead extended the festive shopping period.

He pointed out that Industrials ex-REITs, Banks and Resources were trading at 22 times forward earnings but that low interest rates had created high levels of dispersion between sectors that could provide earnings certainty and cash flow generation and those that were inherently cyclical or had a track record of inconsistent earnings.

Meanwhile, Citi healthcare analyst John Deakin Bell said local biotech powerhouse CSL was racing towards being the biggest stock on the local market.

“The key driver is the immunoglobulin business as the market grows at 8 per cent a year and it takes most of that market share,” Mr Bell said.

“It is elevated, along with the rest of the market, but it is taking market share globally so, putting the share price aside it is continuing to be very well-positioned and we think that industry will continue to grow at quite a rapid rate.”