Money
Issue No. 36 - August/September 2007
Themes from upcoming reporting season
by Mr Marcus Campbell
We have reviewed the key macro themes that we believe investors should be focusing on and that are most likely to drive earnings surprise in the up coming reporting season. Overall earnings forecasts remain bullish reflecting the strong momentum in the domestic economy and ongoing margin expansion. Goldman Sachs JBWere analysts are forecasting 12.6% earnings per share growth for the ASX300 for FY 2006/07 (+11% for Industrials; +15% for Resources).
The key driver of the strong equity market performance has been the attractive earnings environment (see Chart 1). The outlook for earnings growth remains critical given that the industrials are trading on historically high multiples, suggesting relatively little upside from PE expansion.
A key contributor to the strong earnings growth outlook for the non-bank industrials is the ongoing margin expansion. The recent trend in margins highlights the divergence between manufacturing and service-based companies which we expect will continue; particularly given the increasing competitive pressures on the domestic manufacturing sector from the stronger currency. The service-based sectors continue to experience a strong nominal sales environment which has historically leveraged down into earnings, given the relatively high fixed cost base (the opposite effect should also apply if we ever enter a period of soft or negative sales growth).
There have been significant changes to a number of key macro drivers over the last 6 months which we believe could impact results in August as analysts have to adjust to the changing data flow. In particular we have seen:
•Stronger Australian Dollar - the AUD has continued to move higher, gaining some significant momentum during the 6 months to June 2007.
Resource companies are also sensitive to changes in the AUD/USD given the majority of their product is priced in USD while the costs are in mostly non-USD-denominated currencies. The resource companies will hav...
