Australian listed companies still lag their global peers when it comes to profitability

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  • The February reporting season was positive, but Australian stocks are well behind global peers in the outlook for earnings growth.
  • UBS analysts attributed part that to a patchy macroeconomic backdrop, with mixed conditions across different sectors.
  • While earnings growth looks globally un-competitive, Australian companies still upped their guidance for dividends and capex.

Another ASX200 reporting season is in the books and Australia’s corporate sector looks in reasonable shape.

But analysts David Cassidy and Jim Xu from the UBS equities team pointed out that when it comes to profits, the local market isn’t keeping up with global stocks.

“Australian earnings continue to lag the global uptrend, in terms of both the rate of earnings growth and the rate of earnings revisions, which are both very positive globally,” the pair said.

The highlighted column in the table below tells the story:

It shows that Australian companies expect earnings-per-share growth to increase by 5.8% this year – ahead of only Japan when compared to all other major regions and markets.

So while global data trends towards the end of 2017 pointed to evidence of a synchronised global economic upswing, Australian stocks appear to missing out on the ride.

That’s certainly the case when compared to the expected growth in emerging market, not to mention the US, where companies are forecasting 2018 earnings growth of almost 20% in the wake of the Trump administrations tax cut legislation.

UBS pointed to Australia’s macro backdrop as one of the factors weighing on the earnings outlook, as headwinds such as high household debt, low wage growth and rising energy costs remain prevalent.

“It is clear that the picture of an improving domestic economy driving operating leverage as is occurring in many markets offshore is not really playing out in the case of Australia,” Cassidy and Xu said.

“On balance, the results suggest domestic macro conditions are mixed rather than poor. Profit conditions remain patchy and quite stock specific.

“Conditions are clearly strong in infrastructure though discretionary retail showed evidence of deterioration.”

On the plus side domestically, Australian business conditions remain near record highs. And analysis from Credit Suisse (CS) shows ASX200 companies also upgraded their dividend guidance by 0.2% — an improvement on the 15-year average of a 0.4% downgrade.

CS analysts Hasan Tevfik and Peter Liu also noted that companies upgraded their capital expenditure forecasts for the second straight quarter, a result not seen since 2011:

Among the other highlights in February, around twice as many companies beat earnings expectations compared to those that missed forecasts — an historically strong result.

And having recouped most of its early-February losses, the local market has a price-to-earnings ratio of 15.2 times expected 2018 earnings, which is around fair, according to UBS.

But based on the expectations of forecast earnings growth, the results suggest that stock investors should be positioning for at least some exposure to international markets in the portfolio.

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