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Earnings season may fall short of 'rock-star' economy

New Zealand's upcoming profit reporting season, which kicks off next week, is likely to contain a wide range of results, with the potential to disappoint investors who may have bet on the nation's "rockstar" economy to provide an underlying boost to earnings.

Of the 48 companies scheduled to report earnings over the coming weeks, brokerage Forsyth Barr estimates average sales growth of about 5 percent and earnings growth of about 3 percent, while earnings per share will probably decline about 0.4 percent on average.

The brokerage is expecting 13 of the companies it follows to post a decline in their latest six-month earnings of more than 20 percent, while 12 will likely report earnings growth of more than 20 percent.

"There's quite a dispersion of performance," said Rob Mercer, head of private wealth research at Forsyth Barr. "There's a lot of disappointing results coming through and there's a lot of positive results."

Retailers have been among the worst performers, pulled down by under-performances from Warehouse Group [NZX: WHS], Hallenstein Glasson Holdings [NZX: HLG] and Pumpkin Patch [NZX: PPL], while Michael Hill International [NZX: MHI] and Kathmandu Holdings [NZX: KMD] are weighed down by short-term issues. By contrast, Briscoe Group [NZX: BGR] and Restaurant Brands New Zealand [NZX: RBD] are expected to post solid performances.

"The markets have gone up 25 percent over the last 18 months so equity markets have been pretty strong, pointing to a recovery in economic conditions, but it's not easy work out there for sales growth," Mercer said. "You do get periods of intense competition and cycles for retailers. They do have to roll with the ebb and flow of the economy and the seasons."

Cyclical stocks such as Cavalier Corp. [NZX: CAV] and Nuplex Industries [NZX: NPX] have also struggled to grow earnings while New Zealand Refining is expected to post the biggest decline.

"We are continuing to see a better earnings pathway over the next few years but the current reporting season is going to remind people that there's going to be quite a big dispersion of performances between those that are actually doing OK and delivering double-digit earnings growth and those that are actually still finding life fairly difficult.," Mercer said. "Most of these adjustments have already been worked through, we have already seen the downgrades and the upgrades come through and so share prices should already reflect that information."

"Generally speaking the market has shown some comfort around pushing aside the short term negative contributions and focusing on the medium to long term," he said.

Stocks expected to outperform include OceanaGold Corp [NZX: OGC], as it starts to deliver on new assets, and Ebos Group [NZX: EBO] which is set to benefit from acquisitions. Air New Zealand [NZX: AIR] is expected to show good growth while Metlifecare [NZX: MET] recovers and electricity companies post solid performances.

Investors will be most focused on the outlook for earnings in the current 2015 financial year, Mercer said.

"It's not a market that's cheap," he said. At current prices, shares aren't showing any discount to valuations, compared with an historical trend for a 10 percent discount, he said. "It's hard to find good value for risk ideas at the moment," Mercer said.


Comments and questions

What is important to remember about this most over-hyped reference to New Zealand being a "rock-star" economy is that it was in the context of comparison to other countries...many of which were, and still are, financial basket cases by comparison.

NZ being a rock star means we still own our instruments and can at least afford to get to the gig...rather than being the rich and the famous.

The Portuguese deputy prime minister noted growth in Portuguese exports to China, which rose “from 220 million euros in 209 to 660 million euros in 2013,” adding, “in the first quarter of this year growth was even more spectacular.” ...
Trade between China and the Portuguese language countries amounted to US$64.680 billion in the period from January thru June, up 6.83 percent year-on-year, indicate official Chinese figures released today in Macau. The figure for the first half-year includes US$20.463 billion (+2.25 percent) of Chinese exports to the eight Portuguese language countries and imports worth US$44.216 billion (+9.10 percent), generating a negative trade balance of US$23.753 billion for China. ...
Portugal occupies third place, far behind the first two, with trade worth US$2.285 billion (+23.08 percent) comprising exports from China worth US$1.479 billion (+23.88 percent) and imports from Portugal worth US$805 million (+21.65 percent). ...
- BRICS effect?
- we ought to be forming closer links with the Iberian countries?

I dought we can ever fit the image of a rock star economy when policies for prosperity and growth never win elections.
We are totally consumed by taking from success and rewarding failure.

The rock star wasn't anything to do with govt policies, it was due to an earthquake and unsustainable growth in dairy prices.the benefits of both were short term, much like the current government's thinking. Now what?

Just as China has found cheaper imports for Australian minerals causing the Australian economy to stall, the same appears to be starting to happen here with our dairy exports to China.

After the elections our economy will stall as a result.

House prices will correct and many investors will be badly burned.

If it was not for the Christchurch earthquake, our unemployment figures would be moving up. Unemployment has not come down due to rising production, this is important to note!
We are living on borrowed time and living in a fool's paradise!