Reporting season overlooks fundamentals
The current Australian reporting season has largely overlooked the fundamentals and instead rewarded stocks with high P/E earnings regardless of lacklustre earnings, according to Martin Currie, an active equity specialist and affiliate of Legg Mason.
According to Martin Currie Australia’s chief investment officer, Reece Birtles, despite the positive economic backdrop, revenue environment and underlying fundamentals of Australian companies, disappointingly, EPS revisions post-result have had the worst skew in 10 years.
“There is a clear dichotomy in the Australian market, split between disdain for increased investment spend amongst stable, profitable companies, but reward for high P/E stocks doing the same thing – even though increased investment should result in better bottom-line growth in the long run for both sets of companies,” he said.
He added that there was a disconnect in the P/E re-state as the biggest driver of performance over the reporting season.
“This situation has left high P/E stocks looking their most expensive in 15 years. The only reason value spreads are not even wider is that low P/E stocks are not as cheap as they were back in 2009,” Birtles said.
“The result has been to generate far more share price variance between the best and worst companies relative to earnings revisions variance.”
Martin Currie’s analysts have summed up the key cost and investment pressure themes as follows:
- Resource sector was characterised by strong recent cashflow,
- Industrials sector: raw material cost pressure (e.g. oil products, electricity) was too significant to be able to pass onto customers without absorbing some costs into the P&L,
- Utilities sector: government intervention was putting pressure on prices and ageing plants require more capex,
- Real estate sector: capitalisation rates were too low to buy developed assets, so REITs are having to develop new assets on their balance sheets,
- Services in general: wage cost pressure was key, with companies having to increase wages by high-single digits to retain professional services staff, especially in construction, infrastructure and mining (quite contrary to ABS wages data).
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