Profit Downgrades

[Fleeta]

Looks like we are starting to see a lot of profit downgrades!!

I got a trifecta this week - MPI, RCL and MGW - all bad news

I'm starting to think that maybe we are in a bubble caused by high expectations of future profits. Especially considering many of these profit downgrades are still forecasting profits higher than last year.

And remember that 1 profit downgrade is normally not the end of it, because Company's generally don't want to deliver bad news, it gets spread over time...so i'm sticking with my policy of taking the hit of a profit downgrade announcement.

Anybody got any other thoughts on prfit downgrades?

 

[GreatPig]

Well... look what happened to GUD when they announced one.

Cheers,
GP

 

[Smurf1976]

"Higher materials and energy costs have adversely impacted upon earnings" or words very similar are becoming rather common in the announcements of US companies. Profit downgrades here, downgrades there...

Personally my best guess, and it is only a guess (albeit one into which a lot of thought has gone), is that we are going to see a generally slowing economy and all that goes with it as the next major theme in the markets. I'm not naturally a negative person, but that's just how I see it at the moment.

*Even the Reserve Bank talks about growth in the order of 2 - 3%.

*It was on the radio yesterday morning that (Hobart) house prices are down 11% in the past 12 months. Newspaper reports suggest that similar things are occurring in other parts of Australia, notably Sydney, as well.

*Wall Street managed one decent up day and then back down we go (Friday night our time). The US market has basically gone nowhere since the late 1990's. (Up, down, up again but sideways for anyone who bought and held.)

*If you look internationally (mainly UK and US in my case) then there seem to be lots of reports coming through about falling sales of practically every non-essential product. Electronic gadgets of all kinds in the US and the overall sales of upmarket retailers in the UK seem to stand out. The UK in particular seems to be accumulating a growing list of big job losses due to factory closures etc.

*The Bureau of Meteorology suggests a substantially above average chance of an El Niño weather pattern (usually means drought in Australia) developing later this year.

*There is no real sign that the US Fed is about to stop raising rates.

*There is talk of war with Iran - the world simply does NOT have sufficient spare oil production capacity to offset the loss of production, even temporarily, from Iran.

And so on.

Sure, it could all work out fine but I think the risks are somewhat high at the moment. I still own stocks, I'm not totally a bear by any means. But I just think there are a lot of negatives starting to emerge.

 

[Investor]

Looks like we are starting to see a lot of profit downgrades!!

Anybody got any other thoughts on prfit downgrades?

There certainly were many downgrades. Kresta announced a huge 40% downgrade last Friday. I did not hold.

Well and truly into "confession" season as the end of financial year draws closer. I read today in the Financial Review, that if such downgrades move up the "food chain" into ASX 100 territory in any significant way, market sentiment would fall further (stating the bleeding obvious, this) .

The consensus forward P/E's are gradually coming down. What a difference two months make in terms of outlook for the ASX. Then again, stocks fell 25% in one day in Oct. 87.

My reading of the tea leaves is such that sector performance has been diverging and will continue to diverge, in that some sectors (health, utilities and consumer non discretionary) will continue rising or at worst stabilise while other sectors will continue falling. Overall, the ASX index will move sideways. The wild card that is still hard to read is the mining sector. If it continues to rise, after the current pause, the ASX index might go up.

The other wild card is the banking sector. This sector is so big, I wonder whether anyone actually knows what is happening within the loan books?????? From memory, bank shares fell 50% in one month during the last recession. The banking industry wrote off $30 billion in loan losses in one recession.

 

[Investor]

I had a look at the price charts of Orica and Wattyl paints, in the newspaper this morning.

Talk about nosedives!

I do not hold.

 

[Investor]

Another day, another profit downgrade.

Latest is Mirvac. Price dropped 10.7% today.

I do not hold.

 

[Smurf1976]

Wattyl not doing too well?

They make paint, don't they?

If that's so then I think it says quite a bit about the economy in general and real estate in particular. Whilst there are exceptions like industrial protective coatings and lines on the road (though they're thermoplastic mostly these days) a large portion of paint demand is for either new construction (residential) or renovation. If they're not doing well then that speaks volumes about the economy...

 

[Investor]

JB Hi Fi and Salmat have just announced profit downgrades and their share prices have fallen sharply.

I do not hold. (Expected this sector to fall some time ago).

 

[markrmau]

Add CCL to your list, and SSS just called in the receivers.

Last one out, please turn off the lights.

 

[Investor]

SSS has gone SOS.

The writing was on the wall for what - a year???

 

[Investor]

Auspine (ANE) has just announced a 20% profit downgrade after the close of trading today.

Watch the price nosedive tomorrow.

I do not hold.

 

[markrmau]

Funny, commsec listed it originally as after market close. 4.34pm?

Then revised to about 3.43pm (droped in late trading).

I nearly pooped myself after reading your message as I have 10k of GNS. But it is powering up this morning.

 

[Investor]

GNS is a better quality stock.

 

[Investor]

In The Australian newspaper today, is an article that could be of interest:

"THE bears - for the past two years comprehensively outmuscled by the bulls - are getting organised. Marshalling their forces, they are starting to attack the market sector by sector.

On Tuesday it was residential property developers, with $2 billion carved off just five stocks in an afternoon mauling. On Wednesday it was retailers -- a favourite stock market whipping boy of late.

On Thursday, the agribusiness sector was firmly in their sights.

Last week any company exposed to the automotive sector was punished. And at various times in the past few months, the airlines, the paper and box merchants, the media proprietors and the consumer goods providers have been subjected to waves of selling that has pushed individual stocks down 20 or 30 per cent.

These systematic and co-ordinated attacks on the market are becoming a pattern, as any hint of bad news -- poor figures from the Australian Bureau of Statistics, a murmur that profits may miss targets, executive unrest -- is amplified into corporate calamity.

It is a sign of how twitchy investors have become after two years in which the stock market, driven by record-breaking profits, soared 45 per cent to its peak in March.

Nobody thought Australian corporate earnings would rise forever. But, after 15 years of often spectacular economic growth, mostly booming house prices and steadily increasing employment, Australian investors had begun to feel all but bulletproof.

The last few weeks have shown that they were wrong.

"We are about to bring down the curtain on 20 years of spectacular Anglo (economic) performance," predicts ABN Amro equity strategist Gerard Minack.

He sees rising interest rates, slumping consumer demand and falling asset prices cascading through the US and Australian economies in particular, with some ugly results. "If we see asset prices tip, what has been virtuous can become vicious," Minack says, pointing out that falling interest rates, buoyant consumer demand and rising asset prices have boosted the Anglo economies for the last two decades.

The first shoe dropped in Australia in early March when a 0.25percent interest rate increase by the Reserve Bank coincided with a halving of Australia's economic growth rate to an annualised 1.5 per cent.

But the market rallied to a record high that day. Investors did not seem to care about the rate hike, coming so soon after a stellar earnings season in which companies such as AMP, BHP Billiton, the Commonwealth Bank and Qantas contributed to what the Reserve Bank says was a 38 per cent increase in underlying earnings.

Maybe, just maybe, the market seemed to think, Australia had dodged the bullet. Many economists thought that the gross domestic product figure was unduly weak -- it did not reflect the underlying strength of the Australian economy.

Then the bad earnings news started to come in waves.

"Initially the warnings were contained within the small caps," observes AMP Capital Investors head of investment strategy and chief economist Shane Oliver. "But it has been a bit more general than was earlier thought."

In early April, McGuigan Simeon told the market that a glut of Australian grapes and the high dollar would lead it to miss its target. Other winemakers held up well, partly because Foster's was battling to buy Southcorp and partly because McGuigan Simeon has a an unusual business model.

Then, two weeks later, automotive parts maker Pacifica and parts retailer Repco also warned of poor earnings. Pacifica was hit by falling demand from ailing US car giant General Motors as well as the strong dollar, while Repco reported weaker than expected domestic demand.

Next it was the turn of the pulp and paper companies to disappoint. Printer PMP warned on the same day as Repco and Pacifica and was followed a few days later by packaging company Amcor and paper maker and distributor Paperlinx. Rising raw material prices and a strong dollar dragged down the paper companies.

Investors were especially unnerved by Paperlinx, which a month earlier had predicted a stronger second half. Not surprisingly, they savaged the company's share price. It is off by a third since the market peaked on March 21.

A few days later chemicals company Orica and paint maker Wattyl added their voices to the depressing litany, and pinned the blame on rising raw material costs and moderating domestic demand.

Developer Mirvac's warning coincided with a free-fall in new housing approvals. Troubled Multiplex followed Mirvac shares down.

Then JB Hi-Fi announced that profits would come in at the bottom of its forecast range as demand for CDs and other products moderated. Other retailers of luxury goods, such as Harvey Norman, tumbled in its wake.

And those warnings seem to have been the tip of the iceberg. Macquarie Bank's tally of earnings downgrades since last November had reached 90 by the middle of last week, though analyst Paul Stanies says that includes a few repeat offenders. Virgin Blue, for example, has warned three times in the last nine months.

"I think there will be more to come," cautions Stanies. "Some of the downgrades are coming from companies issuing too high guidance and there are signs out there that things are not as easy as they were 12 months ago."

Through the bull market investors and analysts consistently argued that the run-up in stock prices was justified by ballooning earnings. Underlying earnings rose by just under 40 per cent, according to Reserve Bank figures, from just over $15 billion in the six months to June 30, 2003, to $25 billion by the end of last December.

In the same period, according to UBS, the stock market rallied roughly 55 per cent.

Forward price/earnings multiples averaged 15 times, but never got to gravity-defying levels. Except, of course, for the fact that forward earnings multiples factored in some aggressive estimates of what companies were going to earn over the next six months or year.

UBS argued in January that if earnings reverted to mean historical growth levels that would increase the price/earnings ratio from 14.6 per cent to 16.6 per cent. But the bank now estimates that after the market's eight per cent sell off and the surge of downgrades the forward p/e ratio is 13.5 per cent. UBS still appears to think that inflated earnings estimates are distorting the ratio -- noting in January that they were 13 per cent above long-term estimates.

But it considers equity valuations reasonable.

For a long time the stock market seemed prepared to shrug off companies' small problems -- assuming that the glass was still half full.

Not so anymore.

A combination of weak Australian economic data, the rash of earnings warnings and a deteriorating US economy -- still the main engine of global economic growth -- have combined to cast a pall over the market. "It is a very jittery market out there," says Stanies.

Coca Cola Amatil, for example, might feel a little aggrieved at its treatment by the market. The company pointed to inventory hangover, cooler weather and a weak retail environment as negatives for the company's growth, but still predicted a fifth year of double-digit earnings growth.

"I don't think we need to get too bearish," says David Cassidy, equity strategist at UBS, who is starting to see some signs of value in the market. "I don't think the situation is calamitous."

Cassidy has been bearish on earnings for some time and he agrees with GSJBW's list of vulnerable sectors. Furthermore, he expects more downgrades. But he recommends a shift into defensive stocks rather than outright flight into cash. Cassidy and many of his peers see general insurers, yield stocks (such as pure property trusts or Telstra), infrastructure and utilities, staple retailers (such as Woolworths), and healthcare stocks as companies most likely to weather the storm. They are looking for companies which provide staple goods and services and which consequently should be immune from a strong dollar, weak consumer demand or rising raw material prices -- all the things which have dogged the underperformers.

There is some debate among strategists over resource, gambling and banking stocks, however. "We're overweight boredom," says Minack, explaining that ABN is backing "dull companies with resilient earnings."

But he also recommends a few sin stocks. In the coming downturn he expects people to continue gambling and drinking -- though he recommends the big brewers rather than the vintners. Where he parts companies with many of his peers is in pessimism about the resource stocks.

"One of the safest calls is that global growth will be weaker than last year," he says, noting that global growth was exceptionally strong last year. For that reason he sees resource prices taking a break, even if they resume their climb before long.

"I think it is unlikely (the sell-off) is going to spread to resource stocks," says Oliver, who makes a case for a soft landing for the global economy.

"The growth of China is going to slow but probably to levels experienced last year."

"Already we are seeing the Reserve Bank going on hold indefinitely and in the US I think it will only be a few months until the (Federal Reserve) calls a halt."

The two strategists also disagree about the banks. ANZ and St George have recently increased their forecasts for the full year -- though Westpac's half year announcement was more downbeat.

Dr Oliver thinks that the soft economic landing will allow banks to emerge relatively unscathed.

But Minack expects the whole sector to start suffering before long.

"I have always thought that the banks would be virtually the last carriage to come off the rails," says Minack, but he thinks it "inconceivable" that the banks could emerge unscathed from an environment of falling house prices, declining consumer confidence and tumbling retail sales.

If the banks do get hit, Minack has said in the past, the whole market is likely to suffer because they make up so much of the stock market.

Minack is, of course, the most bearish of Australia's market watchers. At the end of last year he predicted that the ASX 200 would end 2005 at 3,000. It closed at 3,983 at the end of last week.

The consensus view is that earnings growth will moderate, but not cease entirely, while the Australian economy enjoys a soft landing and the stock market ends the year moderately up.

But recently his warnings of declining Anglo economies have started to look more prescient. The British and New Zealand economies have also shown signs of slowing at the same time as Australia and the US have stuttered. Rising interest rates and moderating house prices have bedevilled their economies too. In its latest fund inflows Challenger Financial Services reported a 20 per cent increase in cash funds.

Certainly, with earnings downgrades continuing and some of Minack's bleak prognostications coming to pass a few more dollars in nice, safe cash seems like a good idea."

The Australian.

 

[Investor]

In The Age today, comes the following article by Marcus Padley (some readers might know his name):

Having been married "before", I know: relationships are a lot easier to end than sustain. In fact, leaving the old gal took about half an hour from decision to execution. She came home to find the wardrobe empty. She rang me early (ish) the next day with the immortal words "Does this mean you're not coming to the polo on Saturday". Two years of faith (and half a house) gone in half an hour.

It's the same in the sharemarket. Share prices grow over years and collapse in days. Have you noticed? The sharemarket only ever crashes. I don't ever remember it going up 25 per cent in a day, let alone 5 per cent.

It probably stems from the notion that losses have three times the emotional impact of a gain. We fear a loss three times more than we lust for a gain. It makes us slow to buy and quick to sell. In fact, if the numbers are right, share prices will take three times as long to rise as they do to fall.

Look at the chart of your favourite share at the moment. Two years' worth of investing, nurturing, hoping, praying and even, sometimes, researching, all destroyed in a month. It hardly seems fair and probably isn't, but this is a fact of life in the sharemarket. Shares go up like a balloon but fall like a rock.

For those of us who haven't got the patience, for those of us sticking our necks out for the betterment of our children's schooling, the last month has been doubly painful because of another fact of life: shares that offer high rewards usually have the least in the way of fundamentals. The shares we hold have "ideas" for assets, "placements" for cash flow, "hope" instead of sustainable earnings and chief executives with marketing, not management, qualifications. These are shares that rely on the very essence of what the market is now losing: confidence.

The most obvious sectors to rely on confidence are biotech and small resources/exploration. Where would the world be without long-term, patient, equity investment in biotechs and resource shares? Yet, with just a small correction in the market, they are decimated.

The worst performing shares in the All Ords since March 21 are Prana Biotechnology, Polartechnics, Giant Reefs Mining, Benitec, Pacifica, pSivida, Agenix and Fortescue Metals. All are down over 40 per cent in just a few weeks. Punished for not having the fundamentals this month. Punished for taking risks.

For those of us stuck in these confidence shares, there is good news and bad news. The good news? Confidence will return. The bad news? It'll take three times as long as it took to lose it. For those of us trying to gauge market confidence in the future, it's simple. Forget the brokers, the charts and the herd. When the market's up 55 per cent in 24 months, or your shares are down 40 per cent in a month, how confident are you? Trust that reaction. That's all you need.

Marcus Padley is a stockbroker and author of the daily sharemarket newsletter marcustoday.com.au

 

[DTM]

Marcus Padley sounds like a pump and dump stock broker.

 

[Investor]

A stockbroker who has asked readers to "forget the brokers".

Wonder what his clients think??? Then again, they might have decided to take his advice and forgotten him!

 

[TjamesX]

Not really a profit downgrade, as it is a full year result...

AVJ (AV Jennings) reported a 60% drop in full year profit today, the SP has not been hit as market was expecting it.

If anyone had doubts to the property market slowdown - well :goodnight

Have a look at the 5 year chart for AVJ share price.....

TJ

 

[Investor]

Rebel Sport Ltd (REB) today warned its net profit for the year ending July 2 would be in a range of $13.5 million to $15.5 million.

The company anticipates its group result will be at least 15 per cent below that achieved in the previous corresponding period.

I do not hold.

 

[Investor]

....AVJ (AV Jennings) reported a 60% drop in full year profit today, the SP has not been hit as market was expecting it.

TJ

This company almost collapsed during the last economic recession. From memory, it was bailed out by investors from Singapore.

I do not hold.