Will analysts’ cheery dispositions withstand the blowtorch of reporting season?A CHEERY consensus looks like it has given way to an uneasy consensus in the near term, yet analysts in general have retained a cheery disposition for 2013 for the market in aggregate. It seems unlikely this view will completely withstand the blowtorch of the August reporting season.
Professional investors and analysts have now entered the month-long bombardment of news, numbers and mind-numbingly long daily bulletins from research departments that is the August profit-reporting season.
The focus should be firmly on the outlook, although there will always be the odd surprise in terms of reported financials for the year or half-year that has recently ended.
A trend looked to have been set for the industrials last week when staffing, maintenance and project services group Programmed Maintenance Services cautiously noted weak market conditions, following laboratory operator Campbell Brothers’ report of ”real signs on the ground” of weakness in the global resources sector (for which Campbell Brothers conducts assays).
It will be interesting to see how analysts adjusted their forecasts overnight last night for Bradken, which makes cast, machined and fabricated components, primarily for the mining sector.
While Bradken yesterday reported a record order book and expected to maintain production at full capacity in the current six-month period, it noted ”limited visibility beyond that due to the global economic uncertainty” and said it would minimise capital expenditure ”until the outlook becomes clearer”.
These outlook statements were reminiscent of those that have been coming out of the US quarterly reporting season in recent weeks.
And drawing the two together, US-based engineering group Jacobs Engineering Group, a $5 billion market-cap company that is understood to have shed some professional staff in Australia recently, was a little downbeat with its succinct assessment of issues facing Australia following its own results statement last week.
A Jacobs executive told analysts: ”Australia is troubled, more so, I think, than most of the rest of the world. There’s a lot of games being played in Australia vis-a-vis the political situation and various taxes and royalties on the extraction of resources.
”And I think a couple of our customers are seeing that as an issue for where they’re going to invest. And so I’d put Australia a little bit on the negative side or at least not as positive as some of the rest of the world.”
Jacobs’ view appears to be at odds with that of construction leader Leighton, which stated in its half-year results announcement yesterday that ”contrary to commentary suggesting a decline in investment activity in Australia, the group’s addressable markets have never been stronger”.
Which brings us back to current expectations for earnings growth in the year ahead. Using calendar-year-adjusted data, calendar 2012 earnings growth expectations for resources segment of our market, as represented by the S&P/ASX 200 Materials Sector Index, have plunged from 4.4 per cent on June 30 to minus 10.1 per cent now. But growth expectations for 2013 have hardly moved at all.
The materials sector is somehow supposed to bounce back with just short of 22 per cent earnings-per-share (EPS) growth in 2013 – even though equity analysts’ colleagues across the hall in the commodities section are projecting the copper price to decline marginally in 2013 from its current level and nickel to just hold its own (while the Bureau of Resources and Energy Economics has projected an iron ore price decline of 3.6 per cent in the 2013 financial year after an 11 per cent fall in the current financial year.
For the overall S&P/ASX 200, the aggregate growth estimates tally to 1.9 per cent for 2012 and 11.4 per cent for 2013. Once again, these expectations represent a significant trimming for 2012 but not for 2013 (at June 30 the expectations were 8.1 per cent and 12.7 per cent, respectively).
Given the current status of the global economy, we’re not convinced the aggregate 2013 expectations are realistic.
Interestingly, the aggregate consensus EPS growth rate for the smaller companies represented by the S&P/ASX Small Industrials is a far more robust 14.9 per cent for 2012, rising to 15.7 per cent in 2013.
We suspect these aggregates will also come under downgrade pressure but the starting point is far better than for the large, company-oriented ASX 200.
Martin Pretty is head of research at Investorfirst Securities.
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