Money
Issue No. 31 - October/November 2006
SA Stocks - in review
by Mr Marcus Campbell
Reporting seasons are illuminating in many ways, not least being the market’s ability to digest a lot of data in a surprisingly short time. In order to make some sense from this “data dump” we focus on a number of key issues during reporting season:
•The overall direction of earnings revisions and the updated earnings forecasts for the market.
•Any clear trends emerging which might provide some insight into where the likely risk to current forecasts is.
Outlook comments and dividend trends
Any significant or clear trends emerging on a sector basis which questions the market's prior assumptions with a key focus on industry structure.
Overall, we believe this reporting season has come in at the low end of the market’s expectations, with margins for companies exposed to higher commodity prices clearly under pressure. Service-based companies have generally performed well — particularly financial services companies — with little evidence of margin compression. This suggests wage pressures remain under control, or companies are still able to pass these on to end-users.
We believe the downturn in margins is just commencing and will be an issue for companies in the next 12 to 18 months as the higher raw material prices work their way through.
In general, outlook comments have been cautious and there has been a clear lack of earnings guidance, continuing a trend established last reporting season. We believe this reflects a lack of confidence, or clarity, in the outlook — which is reinforced by a lack of capital management initiatives (share buyback plans, special dividends) which was so prevalent 12 months ago.
Some issues our analysts have identified from discussions with companies following the reports include:
•Inflation is now becoming more prominent
•There is no sign of a pick up in residential activity
•Non-dwelling/resource-related demand remains str...
