Innovate, globalise: how CSL avoids earnings rut

DEPARTING chief executive of CSL Brian McNamee, whose performance in building a global company now capitalised at $20 billion could be argued to have earned him the right to offer advice to Australian companies – the majority of which are stuck in an earnings rut.

His answer is innovate, globalise and focus on productivity – salient words from a manager with the gravitas and the track record to deliver a broader perspective.

While there are some examples, particularly among our big mining, companies of innovation and globalisation, there are plenty more that have ridden the back of operating in the Australian market as monopolies or oligopolies. There answer to productivity of late has been to cut staff or wages.

The strong Australian dollar, the weaker economic environment and structural changes caused by the digital revolution have exposed a large proportion of Australian companies that had been cushioned into inaction.

Thus it is not surprising that, with the exception of CSL, the 2012 reporting season has gotten off to a pretty poor start.

Even with continuous disclosure there are plenty of companies that have already come in below expectations.

The market has been looking for 2012 earnings to fall by about half a per cent. But this includes dominant resource companies whose profits will fall much more.

Before the reporting season started, the non-resource sector was expected to post earnings growth of about 5 per cent. But there may be equity strategists (the big picture people in investment banks) that will be wondering if even the 2012 forecasts were on the optimistic side.

The bottom line is that it is hard to find the bright spots on the horizon for companies about to deliver earnings over the next couple of weeks.

Manufacturing at large is unlikely to offer any upside surprises. The dollar in particular has decimated the growth for this group and will result in many experiencing falling profits and will push some into losses.

Retail has already heralded its many challenges – the first is consumer confidence and the second is the structural competition from the online area.

Harvey Norman is the first of the big retailers to report and its earnings reflected these factors. Its move out of consumer electronics is clear evidence of the the extent to which the internet has been responsible for price deflation.

The optimists are hoping to get some positive blip from the government’s stimulus package flowing through to retail sales.

But if history is any guide, it won’t be sustainable. Government handouts do end up in the cash registers and in the poker machines, but once used up spending patterns return to normal.

The media is likely to be an equally sad tale – particularly the traditional media – print and TV. They have been squeezed by the pincer of internet induced audience fragmentation and sluggish or falling advertising revenue.

Aviation – a sector dominated by Qantas – will be ugly as domestic competition is putting pressure on yields and Qantas’ international brand continues to bleed. Building materials shouldn’t produce much joy as construction activity, particularly in residential, has been weak.

The financial services sector while sturdy is feeling the headwinds of slow credit growth and a high cost of funding. The only major bank to report in this period is the Commonwealth Bank, but it should set the tone for the remainder, which report in three months.

There are a couple of bright spots. Healthcare is one nominated by several analysts. CSL has already produced a solid result. Cochlear, however, disappointed the market due to costs associated with a recall of a product.

But this company should also be put in the clever, innovative and global group. It now has around 65 per cent of the global market in hearing bionic implants and ploughs plenty back into research and development. Its chief executive, Chris Roberts, was particularly upbeat in his commentary on the expectations for 2013. Nonetheless, the stock was trashed in yesterday’s trading.

The resource sector, while still churning out massive amounts of cash, has already been sold-off by the market this year, with expectations that most of the established players will report profit falls thanks to weaker commodity prices.

However, the mining services sector is predicted to be a brighter spot on the earnings horizon given the already committed expansions and new projects in the mining industry pipeline.

Given that markets always focus on the future, the driver of shares should now be what kind of recovery can be made across Australian listed companies in the current 2013 year.

The investment bank experts are looking for earnings growth of around 10 to 12 per cent in this period. But it’s a fair bet these will be revised down after the current reporting period is over in a month.

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