Read: The full Investment Month in Review February 2018 Newsletter
Read: The climate for Fixed Income in 2018
As always, the results have been mixed, but overall quite reasonable, with the earnings revision ratio (the number of forward earnings estimates that increased less the number of estimates that decreased, expressed as a percentage of the total number of forward earnings estimates) moving into the positive, a rare outcome post the GFC. However, Australian earnings continue to lag the global uptrend, in terms of both the rate of earnings growth and the rate of earnings revisions (both very positive globally).
The Australian listed corporate sector (much like the Australian economy) is showing relatively muted leverage to the global economic recovery that is buoying earnings globally. Market wide EPS (earnings per share) growth expectations for FY18 have held fairly steady at 6.6% (4.3% ex resources). This compares to a 14% expectation for CY18 global earnings growth. The small cap (ASX 101-300 basis) results saw a similar tone to the large caps (ASX 100) with FY18 and FY19 estimates both raised slightly (which is a better than usual result for the small cap sector).
There was significant upgrades for the likes of a2 Milk, Resmed, James Hardie, Origin, CSL, Computershare, Insurance Australia Group, Orora, Treasury Wine Estates, Boral, Fairfax Media, and Magellan Financial Group. Of these we note a skew to global plays, though we saw strong domestic earnings drivers for the likes of Origin Energy, Boral and Insurance Australia Group.
We note significant downgrades for; Vocus Group, Tabcorp Holdings, BHP Billiton, South32, Domino's Pizza Enterprises, Suncorp Group, Star Entertainment Group, Commonwealth Bank of Australia, Bendigo and Adelaide Bank as sluggish revenue growth or operational issues created headwinds for the bottom line.
While not universal, we believe cost pressure appears to be a growing issue, leading to margin pressure in a number of disappointing results. Cost pressures, such as energy and labour expenses, are beginning to come through in the resource sector in particular as evidenced in the results of BHP Billiton, South32 and Rio Tinto. Other industrial styled companies seeing cost pressure included Ansell, Brambles, Healthscope, Suncorp Group and Tabcorp Holdings.
Once again there has been a clear net tendency for positive dividend/capital management surprises, particularly dividends, albeit share-price reactions have been relatively muted. While pro-active capital management initiatives have been a feature of results, we do note two large equity capital raisings (Woodside Petroleum and APA Group) accompanying their profit releases.
The market has continued to bid up well performing premium rated stocks. Share prices of a2 Milk, CSL, Resmed and REA reacted strongly to good results despite concerns that much of the good news was already factored into their elevated share prices. Similar supportive trends towards "growth" stocks has generally been evident in the small cap reporting season.
The Australian market has recovered from its early month weakness due to US inflation jitters and currently sits on 15.2x one year forward expected earnings, which looks fair to us.
Generally, the earnings season is supportive of ongoing market gains particularly with the resources sector still notionally cum upgrade at spot commodity prices. However Australia's aggregate growth rate is pedestrian in a global context and while reporting season has confirmed pockets of strength, we think valuations in these areas don’t offer a lot of value.