Earnings season winners and losers

Nicholas Grove  |  08/02/2013Text size  Decrease  Increase  |  

Nicholas Grove: This week saw the likes of Telstra, Cochlear and Transurban release their results for the first half of the 2013 financial year, while NAB and Macquarie provided first-quarter trading updates. Here to give investors an idea of which companies impressed and which did not, I'm joined by Morningstar head of equities research Peter Warnes.

Peter, thanks for joining us.

Peter Warnes: Thanks, Nick. It's always great to be here.

Grove: First of all, Peter, let's start with Telstra. Did the company deliver as you expected and were there any surprises, either positive or negative?

Warnes: No, Nick. Telstra delivered as expected and then reaffirmed guidance for the full year in all the benchmarks - in other words, in revenue, in EBITDA, and free cash flow, and also more importantly, the dividend. So, no surprises in terms of the result.

In terms of the operations, positive certainly in mobile - what the market expected. Another 607,000 mobiles added, 14.4 million mobiles in service. They continue to take market share. It is the growth engine of Telstra now. The negatives - and the market expect them and there is nothing to get worried about - were a 10.8 per cent fall in PSTN or the traditional fixed-line operations and Sensis was under some pressure, as was expected. But importantly for Telstra, we are now less than five months away from going into 2014 financial year and that should bring a higher dividend, paying $0.28 currently. We expect it to move to $0.30, maybe $0.31 for FY14.

Grove: Peter, moving on to NAB and Macquarie, was there anything in their quarterly updates that caught your eye or was a cause for concern?

Warnes: Nick, NAB was a relief, if you like, given the bad news that came out on their downgrades earlier. Lower bad debts obviously helped good cost control. Their Australian franchise is still doing very well. I'd love to see the exit of the UK, but that probably will take a little time, but no, overall, positive from the NAB, looking like a $6-billion impact for the full year. So, no, we're comfortable there.

In terms of Macquarie, it's a little disappointing that the guidance came in at a 10 per cent increase year-over-year for their FY13 number. That was below consensus and that's not surprising given that we're going through some pretty ordinary conditions, particularly in the market-facing operations, albeit that they are improving.

And so, I would say to you that probably the worst is over for Macquarie Bank. The engine room, if you like, of their operation is the asset management and funds management operation, which is annuities-style income. That's going very well, but the market-facing operations are where you do get some leverage. So, Macquarie Equities and some M&A, they could now start really kicking some goals as the equity markets move higher. So, I'm expecting a better fourth quarter - in other words, the March quarter, which finishes the year, has some nice tailwinds.

Grove: Peter, what did you think of the results from Cochlear and Transurban, and do you have any concerns about these businesses?

Warnes: Two very, very distinctly different businesses there. Cochlear - again, it was disappointing, and mind you, the stock has had a very, very big run through the $80 mark. The disappointment was that it appears they have lost market share in the non-Chinese or excluding Chinese sales, so in the sales to the US, Europe and the rest of the world, which have much more higher margin than the Chinese sales, they seem to have lost market share. And don't forget, they are coming off a comparative period last year where there was a major recall that cost them about $130 million. That's where the market did have some concern. I would suspect that it's only of a short-term nature. The aggressive R&D is important, and I think that you'll see more innovation, more new products come on there, and we are not concerned about the long term for Cochlear overall. It's basically an immature market that still got a plenty of growth.

Transurban - the result was in line with expectations, there's nothing surprising, a couple of positives and a couple of negatives, and negatives were what was happening in the Sydney market, if you like, M2 and M5 upgrades, car parks rather than freeways, and so, therefore, the revenue was under pressure there, albeit that there was some price rises or toll increases offsetting that. Melbourne CityLink helped and they got some upgrades there in terms of both volume and some toll increases.

In the US, there are a couple of problems there that, albeit in terms of the portfolio were small, but niggling. The upgrade of the 495 Express Lanes isn't working and looks like it could have to be written down to zero. That's coming off the back of a disappointing investment in Pocahontas. And if you get a couple of those things back-to-back, the market might say: "Well, this is what you are doing." So, look, we're comfortable with Transurban. The free cash flow is still not covering the distribution, albeit, only by a small margin, but we're still okay.

Grove: Finally, Peter, earnings season can be an overwhelming time for investors as they feel like they are bombarded with information from all sides. What do you think is the most important thing investors should keep front of mind so that cooler heads prevail?

Warnes: It's a good question, Nick. They'll get bombarded and the analysts get bombarded as well. So, my advice to both the analysts and to the investor is try to keep a cool head and don't panic. Figure out why you bought the stock - why is it in your portfolio, and look at the reports that are coming at you, and say with a cool and calm demeanor, say, "Is it doing what I expected it to do?" If it is, don't worry about it. If it's not, then dig deeper. So, in the cool climate, no panic, sit back and say, "Do I stay with that stock, because it's not delivering what I expected it to do? That's the reason I bought it - should I exit?"

It's a good time to have a look at the portfolio and say: "Do I need to do anything with it?" And if you do, do it with the equipment, that is, the result just fresh in your mind. So, don't panic, look at it in a relaxed manner and maybe do some tidying up. Leave the winners - the good ones. Leave them alone, you don't have to worry about them. If they're delivering, leave them alone. Just be concerned about the ones that aren't matching what you expect them to do.

Grove: Peter, thanks very much for your time today.

Warnes: Pleasure Nick.

Video Archive...

Big bank dividends are sustainable
29/04/2016  Westpac, ANZ and National Australia Bank report half-year earnings in the week commencing 2 May and Morningstar's David Ellis gives investors a taste of what to expect.
Don't expect iron ore rally to continue
26/04/2016  Investors are underestimating how much steel demand could decline, says Morningstar's David Wang.
Japan running out of options to boost growth
26/04/2016  Japan's is into its second lost decade. Have central bankers run out of policy tools? JPMorgan's London-based Talib Sheikh says investors should be wary of further easing.
China businesses are unattractive to investors
20/04/2016  China may be the biggest player in the emerging market universe, but there are far more compelling investment opportunities in Africa and South America, according to a UK-based fund manager.
Where should you invest in Australian media?
15/04/2016  MandA fever may be building towards a "Groundhog Day" ahead of a potential relaxation of media ownership laws in Australia, as structural headwinds continue to intensify.
Where should you invest in Australian media?
15/04/2016  M&A fever may be building towards a "Groundhog Day" ahead of a potential relaxation of media ownership laws in Australia, as structural headwinds continue to intensify.
China's debt is not a problem
15/04/2016  The International Monetary Fund has expressed concerns about China's debt levels but Doug Turnbull of the UK-based Neptune Investment Management says the debt is concentrated and not a problem.
Value investing in a low growth environment
07/04/2016  Morningstar's Daniel Needham explains how to buy an equity or bond at less than its intrinsic worth in a world where the reward for risk investing is diminished.
5 demographic trends driving investment profit
06/04/2016  What is the influence of workers and consumers on stock markets? Dr Amlan Roy explains the implications for asset prices and capital flows, emerging markets and sustainability.
The Morningstar Economic Moat Rating
01/04/2016  The Morningstar Economic Moat Rating represents a company's sustainable competitive advantage. A company with an economic moat can fend off competition and earn high returns on capital for many years to come.
Why you should shun popular stocks
31/03/2016  Investors cannot all buy the same stock at the same price--popularity affects price and leads us to buy high and sell low, obliterating any profit we could have gained.
How to break from the crowd and be a successful investor
31/03/2016  Sir John Templeton stated that: "It is impossible to produce superior performance unless you do something different from the majority." James Montier from asset manager GMO explains how.
Is it too late to invest in Japanese equities?
22/03/2016  The easy money has already been made in Japan, the UK-based Polar Capital's James Salter says, but look for those cyclical stocks with depressed prices and you can still make a profit.
Don't lose the overconfidence game
22/03/2016  Investors who are overconfident in their abilities may trade more often and hurt themselves in the end, says UC Berkeley professor Terry Odean.
What's in store for Telstra shareholders?
18/03/2016  Morningstar's Brian Han talks investors through Telstra's half-year result and why the telecoms giant has been trailing the market since the start of 2016.
Preparing for lower long-term returns
10/03/2016  Investors may not be rewarded for risk-taking during the next several years, so they should tweak their spending and saving patterns instead, says US-based financial-planning expert Michael Kitces.
Hyperion named Fund Manager of the Year
07/03/2016  Hyperion Asset Management has received the top award as Morningstar's Australian Fund Manager of the Year.
Why you should not fear a US recession
03/03/2016  The S&P 500 is back into positive territory for the year, although losses in the UK and Europe are still in the high-single-digits, but investors should stay positive.
Are markets overreacting to China?
02/03/2016  Considering the global importance of China's economy, the country's troubled growth prospects are likely to weigh heavily on the world for years to come.
Earnings season better than expected
26/02/2016  Morningstar's Peter Warnes shares his views on the latest batch of results from the likes of QBE Insurance, BHP Billiton and Wesfarmers.