Macquarie Research Equities (MRE) have conducted an extensive analysis of stocks that are at risk of earnings downgrades due to increasing cost pressures. While softer revenues are a problem, the real concern lies with accelerating cost growth that is effectively eating into company margins. Against this backdrop, MRE believe that rising costs present an increasing risk to company Earning Per Share (EPS) growth forecasts for FY06. Such cost pressures have been well publicised and include rising commodity and material costs and the strongest wages growth Australia’s experienced in the last five years. The following article outlines those companies that might be particularly susceptible to earnings downgrades due to their exposure to these increasing costs.

Who Might and Might Not Disappoint ? The FY06 growth drivers differ significantly between offshore and domestic stocks. Those with internationally driven exposure (including resources) are forecasting strong growth largely due to strong revenue gains. Many domestically focused stocks, however, are forecasting low, even negative EPS growth. Within these forecast many are strongly dependent on margin recovery/expansion. Stocks rated as having earnings risk from rising costs and largely reliant on margins for growth in FY06 are:
Amcor (AMC), David Jones (DJS) Miller’s Retail (MRL), Adelaide Brighton (ABC), Coca-Cola Amatil (CCL), Lion Nathan (LNN), PMP Limited (PMP), Patrick (PRK) and Seven (SEV).

Stocks not considered to have a high risk from rising costs and with little reliance on margins to drive EPS growth in FY06 include:
Aristocrat (ALL), Woolworths (WOW), Worley (WOR), Sonic Healthcare (SHL), Seek (SEK), Resmed (RMD) and Cochlear (COH).