ASX is over the earnings hump

As it is the last day of the biggest week of earnings season, a quick synopsis of what has been reported is in order.

So far we have seen 126 of the 193 companies expected to report either half-year or full-year results. The ASX is now over the mound as it were, with 65% of companies having now reported.

The figures out of this season have been very interesting.

Having a look at the sale and earnings lines; only 41% of the 126 companies have surprised on the upside on the sales line, while 49% have surprised on the earnings line (with 2.7% coming in line with expectations).

This suggests one thing: the biggest theme to FY13 reporting season is consolidation. This isn’t new companies across every sector have stated very clearly that the sales environment has been ‘challenging’ (most common buzz word in market land at the moment) and that this is expected to continue in FY14.

The fact that 52% (including the in line results) of companies improved the earnings line illustrates that consolidation is well underway. The winding down of discretionary spending is working and these companies are making the ‘right’ decisions in this challenging environment.

FY14 guidance also suggests that the earnings line will continue to be the line that will surprise on the upside, as we have seen several companies this week suggesting there is still ‘plenty of saving’ to be made across their respective business.

Breaking these figures down into sectors, the differentials between sales and earnings become a stark reminder of why the RBA and the like are calling the ‘slowdown of the mining sector’.

Of the 17 basic material companies that have reported, only 21% beat sales estimates, but 61% of them have beaten the earnings line. Of the 28 industrial companies, 40% have beaten on the sales line with 44% on the earnings line. Of the 31 financial firms (including REITs) to report so far, 41% have beaten the sales line with 50% of them beating earnings expectations.

These have been the sectors that have been the most vocal about the current ‘challenging’ environment. They are the sectors that have cut hard into discretionary spending, which explains why companies that offer services to mining, finance and consumers, have been hardest hit; as they have products and services that are deemed to be unnecessary and can be discarded (i.e. life insurance, mining exploration and engineering).

There are a few sectors that are seeing revenues ramping up and these sectors have been well flagged as well.

Oil and gas have seen 80% of the companies that have reported beating to the sales line with only 50% of them beating on the earnings line. The difference here is that most of these companies are going through major capex projects (which will increase production even more in future financial years). Once completed it will put the sales line under even more upside pressure.

Telecommunication companies are in a similar boat; although a small sector is dwarfed by one player, Telstra, there are several IT communication players that are up and coming with very interesting business models and projects. It is these companies that are looking to integrate technologies that Australians want such as 4G (really 5G), cloud services and other forms of high speed communication.

There is no doubt the coming financial years will be tails of growth and consolidation; the question will be which sectors will fall into these categories? 

Moving to the local open and today will be a lot quieter on the earnings front now that both Wednesday and Thursday are done. The main results today are Crown, Lend Lease, Sims Metals and Transpacific industries. With the Crown (CWN) result the most watched as we look to see if James Packer’s VIP vision is coming to fruition at his Melbourne and Perth casinos.

The local market looks like it will have a bounce today after falling for most of the week. The opening calls are suggesting the ASX will add 28 points to 5103 (+0.55%). The market started the week at 5113; will it finish in the green?

BHP’s ADR is suggesting the stock will add 55 cents on the open, to $35.82 (+1.52%), having been smashed since its report on Tuesday night. It is the upswing in the materials space today that could see the ASX making the week beginning the 19 August a green week.

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