Reporting Season Final Update (March 2007)

Last week, global markets stumbled following reports that China was looking to impose controls to curb its rapidly growing economy and concerns that a soft landing for the US economy may be more difficult than first thought. In the background, the Australian reporting season continued its final week, here are analyst Macquarie Research Equities (MRE) observations and thoughts. The HY December 2006 aggregate earnings reported for the market printed 1.5 percentage points below analyst expectations versus those held at the start of this reporting season. While the notable drivers of this below-expected result are small industrials (3.9% lower that forecast) and resources (4.8% lower than forecast), large cap industrials and banks delivered earnings above the market’s pre-reporting season expectations. Strong to outstanding stock results through this reporting season were CBA, and, among the industrial stocks, ASX, CPU, COH, CSL, DOW, GWT, JBH, LEI, MND, TSE, TTS, WOW, JBH and SEK, while WOR and ORG were the stand-outs in the resource sector. Stocks notable in their disappointing earnings were ADB among the banks, and ABS, AEO, AFG, ANN, COA, HSP, FGL, IAG, KRS, RIC, RIO, SRV, SSX and SYB. It was also notable that a number of small cap resources struggled to deliver EPSg as forecast due to operational issues.

Stock analyst MRE's overview of this reporting season is that it is one of contrasts. The results suggest three key themes:
1) Demand for services being provided to the resource and infrastructure sector continues to see a strong demand cycle which is providing a 'stronger for longer' profit growth cycle.
2) Stocks with dominant market positions continue to deliver. Absolute profit growth was not only above that of the market, but also continued to exceed analyst expectations.
3) By contrast, stocks in an already challenged competitive position delivered EPSg around zero. The profit results for these stocks did not exceed market expectations with forecast EPSg largely unchanged over the last three months.