Australia’s biggest companies have offered a dismal report card

While the miners are on a comeback, the rest of corporate Australia has disappointed when it comes to their latest set of numbers.

Every investor should take a very hard look at what they used to regard as core shareholdings.

Here’s the pattern this reporting season.

Every morning the results stream out from the big ASX companies: mostly predictable, but often below expectations and generally uninspiring. Every afternoon the brokers issue reports telling us the season is good enough … don’t believe it.

This is a bad results season. The headline figure says we had 18 per cent lift in profits — but that’s a distortion from miners which rebounded from losses. The truth is that without the miners we will be lucky to get 5 per cent after a string of disappointments.

There are two big fears in this market as we approach the end of the calendar year.

The first is a looming market correction in the short term, based on the historical pattern of downturns at this time of the year.

The second is that with the ending of so-called easy money, the earnings of companies are going to have to do the heavy lifting in the months to come. But there is very little evidence that earnings growth is on the way. The consensus for earnings per share growth in the year to June 18 (ex-miners) is again 5 per cent.

That consensus now looks to optimistic. At the half-way mark of this reporting season our biggest companies have let us down and crucially, as far as investor confidence goes, the damage is now done.

In essence there are only a handful of companies that can swing sentiment. This select group approximates the top 10 companies held by the most reliable listed investment company in the market, the Australian Foundation Investment Company.

The top ten holdings at AFIC are the big four banks — ANZ, CBA, NAB and Westpac, BHP, Wesfarmers, Rio, CSL, Telstra, and Transurban. There are a handful of names you might add here — but that line-up would be awfully close the core stock portfolio for any private investor.

Now if we look closer at that AFIC top 10 list, we have only one bank that reported a full year and that was CBA, which managed a modest 4.6 per cent profit lift while the management became in enmeshed in its deepest scandal yet and CEO Ian Narev was shown the door months before the market might have expected his departure.

Telstra — the single most reliable dividend payer in the market — lost its crown at a stroke when CEO Andy Penn announced future dividend cuts and the stock retreated to under $4, where it has remained.

Telstra CEO Andrew Penn presenting results this week. Picture: AAP

Wesfarmers also offered a lukewarm earnings call: group profits up but Coles profits down. It is clearly facing a period of uncertainty in Britain with an ill-­advised expansion and at home with a new CEO Rob Scott, who has a very difficult act to follow replacing Richard Goyder.

CSL — the one stock that usually surprises on the upside — surprised on the downside this time, and the stock has been treading water since.

Yes, the two big miners offered big profits — and profits instead of losses this time. Yet Rio did not match expectations, and while BHP may have tripled its dividend, how can investors take the company seriously when this comes directly after the group cancelled its progressive dividend policy?

Just to round the AFIC list off, Transurban was also disappointing and got hit with a string of downgrades. The toll operator actually had a ninefold increase in profits, joining a tiny group of outperformers but again the outlook (on costs this time) was worse than many expected. No wonder AFIC boss Ross Barker was so cautious at his own results announcements a few weeks ago — he would have known more than most what a dismal round of earnings announcements was coming down the line for his biggest holdings.

BHP's chief executive Andrew Mackenzie this week. Picture: Aaron Francis

Looking forward

If we dare to step outside the household favourites list we see results that have really shot a hole in the side of this year’s reporting season.

Where would you like to start? Dominos, a food retailer; BlueScope, a steelmaker; Healthscope, a healthcare specialist; QBE, an insurer — they have little in common thematically except that as a group they gave the distinct impression to all investors that things were going a lot better than they were.

Perhaps, you say, the market may focus on positives going forward — the build-up in confidence, the expanding plans for capital expenditure, the traditional defensive nature of our high-yielding market at 4.3 per cent, on top which you get your franking credits.

Perhaps, too, we should be more optimistic about the perennially impressive Fortescue or Carsales, IOOF or Treasury Wines. All that is true but the future health of ASX leaders is going to be about earnings, not yield.

Brokers are trying to put a brave face on it — they say that across the wider market the downgrades have not been too bad and that the season is just about good enough:

To put this argument in a nutshell, they say that the downgrades to earnings are not as bad as we have had in recent years. But looking ahead from here, the forecast for next year EPS growth (ex miners) is only about 5 per cent — no real change from the figure this year. So where’s the much-anticipated earnings expansion?

On an individual stock basis the commentary is more subtle — at Telstra shareholders are told the worst should now be over, at Wesfarmers we are told the good parts (the supermarkets) can carry the whole enterprise. At the miners we are told the cash — but only as special dividends — will flow.

Dominoes, BlueScope and even the perennially disappointing financials such as QBE are just plain misunderstood and will come right ... just wait.

A little disappointing: Domino's Pizza delivery bikes in Brisbane. Picture: AAP

Very little of this commentary is convincing, except perhaps that CSL has been oversold by a market which made predictions for it that were never justified.

All up it suggests every investor should take a very hard look at what they used to regard as core shareholdings, regardless of what their stockbroker might be telling them.

It is not by any means an argument for ETFs or index funds — in fact, this earning season suggests ETFs underpinned by the market leaders will be offering modest returns in the months ahead.

But it is a strong argument for focusing on the very best stocks and not taking the wider notion of a ‘‘market’’ or an ‘‘earnings season’’ as anything that should dictate your investment outcomes.