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.

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