Deutsche Bank held a media briefing today to present its analysis of the Australian earnings season so far, which includes almost three-quarters of companies announcing half year results.
Only 48% of companies have met expectations compared to the four year average of 52%.
And also below trend is that fact that only 42% of companies have had earnings forecasts upgraded.
However, the Australian market is continuing its march higher in 2015, with the S&P/ASX 200 index at a 100-point striking distance of 6,000.
Deutsche Bank has six key observations:
1. Investors like what they see. It doesn’t seem to matter the results are hitting below the average. “The market has performed well, rising a little more than global equities and the PE (Price Earnings) ratio holding at a high level (16¼x),” Deutsche Bank says in its strategy update. “It seems that simply evidence of some upward trend in earnings is enough to make equities attractive given where interest rates sit (at a record low).”
2. Share price volatility has returned after a quiet 18 months. “This may reflect full valuations in the market,” Deutsche Bank says. “Stocks that disappoint are de-rated back to more normal valuations, while stocks that deliver on earnings are seen as a safe haven.”
3. Cost cutting rules. The trend among Australian listed companies to cut costs to improve the bottom line continues. “Efforts poured into efficiency programs/cost control continue to bear fruit,” says says Deutsche Bank. “Most obvious has been the continued success for BHP and RIO, and the symmetrical pain for mining services.” However, industrial companies are also shaving expenses to improve earnings even with subdued sales. These include Sims Metals, Boral, Fletcher Building, Asciano, Caltex, Brambles and Computershare.
4. Dividend growth. These have been solid and Deutsche Bank expects dividends to grow ahead of earnings through this financial year. “Forecast payout ratios have edged marginally higher for industrials and banks,” Deutsche Bank says. And dividends are expected to grow by 4% in this financial year.
5. Poor earnings growth. Overall, the earnings growth has been small for the December half, an average of around 2%. This can be blamed on resources companies challenged by the downturn in commodities prices. “This drag is likely to persist through 2015,” says Deutsche Bank. “Pleasingly, earnings are considerably better in the other 84% of the market – industrial earnings growth is accelerating, and banks are solid.” And there’s more to come. Iron ore prices alone have pulled earnings for the resources sector down about 24% and the full impact of falling oil prices lies ahead. Deutsche Bank says: “Outside of resources, earnings momentum is quite reasonable. Banks continue to grow profits in the 5%-10% range. And industrials profits growth is at multi-year highs.”
6. The economy. Some companies are doing quite well, especially those exposed to the strong housing market are reporting better results. And real estate investment trusts say store sale growth has edged up and gaming stocks are doing well. “But there is little growth evident for logistics, business services and traditional media companies, and listed retailers give mixed feedback,” says Deutsche Bank.
The local market has outperformed – just – global equities, as this chart shows: