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...

Building wealth with building materials
09/02/2016  Morningstar's Tim Mann examines those stocks poised to benefit from strong housing activity and a strengthening US economy.
Safe withdrawal rates for retirees
02/02/2016  Morningstar's Anthony Serhan explains why retirees in Australia should use lower initial safe withdrawal rates than those suggested in prior research.
Key factors for picking dividend-payers
01/02/2016  The income stream from dividend-payers can play a special role in funding portfolio withdrawals, says Morningstar's Josh Peters.
What is alpha and why should you care?
27/01/2016  Alpha is often described as the extra profit delivered by fund managers on top of market returns. Understanding alpha can help you make better investment decisions.
Australia offers investment growth
20/01/2016  Sentiment towards Australian equities has been unduly negative, says Fidelity's John Lo, and alongside Korea, Australia is providing an unexpected boost to portfolio returns.
Credit securities: The good, the bad and the ugly
14/01/2016  The ability to meet payments and obligations to investors is what separates a good credit security from a bad one, and moat-rated issuers have a stronger ability in this regard.
Why the world is worried over China
13/01/2016  Knock-on currency effects and trade concerns are weighing on, in some cases, fully valued global markets. The result: a rocky ride for investors.
What's fueling the volatility in China?
08/01/2016  Fundamental, technical, and behavioural factors are all at play in sending Chinese and global shares lower, says Morningstar's Dan Rohr.
China woes to cause market volatility
08/01/2016  The US economy is mostly insulated from a slowing China, but that doesn't mean a smooth ride ahead for global stock markets, says Morningstar's Bob Johnson.
ETF investing rules of thumb
05/01/2016  There are many potential benefits to ETF investing but there are a number of rules investors should heed in order to avoid problems.
Top tips for small-cap investing
14/12/2015  The founder of the Eley Griffiths Group gives investors an idea of what to look for should they wish to dip their toes into small-cap waters.
Does the Japan stock market have further to rally?
10/12/2015  Japan was tipped as the hot market for 2015 and it has lived up to predictions. So how much further does the Nikkei have to rally?
Key stock evaluation metrics
08/12/2015  Australian Foundation Investment Company managing director Ross Barker discusses how he and his team go about assessing stocks with long-term prospects.
The most important statistic for dividend investors
03/12/2015  The payout ratio--the dividend rate divided by earnings--can give you an idea of how well covered the dividend is, and how likely it is to grow, says Morningstar's Josh Peters.
Tailwinds blow for Europe and Japan
01/12/2015  Given their solid forward earnings growth prospects and policy tailwinds, European and Japanese equities look favourable, BlackRock's Stephen Miller says.
The importance of valuation
25/11/2015  Valuation is critical as it drives both risk and return, and buying the wrong asset at the wrong time can have devastating consequences.
2016 another difficult year for emerging markets
24/11/2015  Emerging markets veteran Hugh Young of Aberdeen admits that 2015 has been hard for investors but says stocks are cheap and there are gains to made over the long term.
Emerging markets: down but not out
18/11/2015  Emerging economies have struggled in recent years, but their increased productivity, stronger population growth, and rising middle classes represent an important growth opportunity for the future.
Characteristics of quality investments
17/11/2015  While markets may be constantly changing the traits of good-quality companies remain the same, Celeste Funds Management's Frank Villante says.
Moats, stewardship and managing volatility
12/11/2015  Morningstar's Mathew Hodge looks at how moat ratings complement an income strategy and can steer investors away from a range of problems.