Market watchers differ as firms open the books

Telecom CEO Paul Reynolds. Photo / Natalie Slade

The pace at which the sharemarket recovered from losses after the global financial crisis has raised questions about how sustainable the gains are.

This reporting season will shed some light but uncertainty and caution will remain strong themes in management commentary, say market watchers.

Craigs Investment Partners head of research Mark Lister is upbeat about the current round of corporate results, with his optimism based in part on the brighter tone of recent numbers from US and Australian firms.

"By and large they've been pretty impressive. A lot of companies have beaten guidance. I guess we can draw a few conclusions from that for us over here."

The Australian economy is, as Lister observes, much healthier than our own, with a declining unemployment rate and the Reserve Bank of Australia raising interest rates already.

The difference between the two economies is starkly portrayed in commentary from Australian companies with businesses here who have often commented on rather lacklustre performance from their New Zealand operations.

But the flip-side of that is the prospect of an Australian boost for those New Zealand companies with transtasman operations such as Fletcher Building, Methven, Hallenstein Glasson, Michael Hill and Pumpkin Patch.

"Some of those stocks might do okay because their Australian operations are leveraged to a stronger economy."

But even with the domestic economy still weak, Lister sees the prospect for bottom line improvement for some firms.

"Cost cutting is still coming through and still likely to have a positive effect on margins and bottom line profits even if we haven't really seen any rebound in top line sales growth.

"Also interest costs will have come down quite significantly since the second half of 2008 so that's going to be another thing to boost those bottom line profits even though we're not seeing any real sales recovery as consumer spending and demand is still quite low."

Lister says stocks worth watching as pointers to how the wider market and economy will fare include Fletcher Building for a steer on the construction and housing sectors, and Freightways and Mainfreight, which are "strongly leveraged" to the domestic economy.

He will also be keeping an eye on Tourism Holdings and PGG Wrightson for what their results may say about key export sectors.

First NZ Capital's head of investment Rob Bode is somewhat less upbeat.

Scanning his firm's results calendar and the accompanying forecasts for earnings per share numbers, he notes "a pretty negative theme in terms of earnings coming through".

"The positive ones are in the low single digit figures but there are more negatives than positives. Things are pretty tough out there and you're probably not going to see very robust top lines."

Even a number of guidance upgrades, particularly from retailers, fail to hearten him.

"That was because demand just fell into a hole in the previous corresponding period. You've had a sharp recovery there but it's more of a normalisation rather than growth."

AMP Capital Investors head of equities Guy Elliffe is looking for a reporting season that is "quite constructive".

"On balance earnings will be in line with expectations but the market as always will probably be more concentrated on guidance.

"The data's still somewhat spotty, but we're getting more confidence from the managements we speak to than we were three months ago. We think earnings revisions are going to be generally positive despite the economic volatility.

Craigs Investment Partners' Lister agrees that with the market being forward looking it will be firmer commentary rather than the backward-looking numbers which will capture the market's attention.

"There are still plenty of uncertainties out there and during the last reporting season you saw management teams very reluctant to put themselves on the line as far as what's happening. This time around some of those management teams seem to be a little more open to actually making some more specific comments."

First NZ Capital's Bode also expects an improvement in the quality of commentary from companies. "Obviously things are more optimistic now but it's a subdued growth environment.

"We're starting to see evidence of the property market slowing, some areas just plateauing or the optimism that was here a few months ago is starting to wane.

"Things are in much better shape than this time last year and one difference is that most companies whose balance sheets needed to be repaired have done that.

"However there will be still an air of caution in terms of what is portrayed. The prevailing feeling would be that we're not quite out of the woods yet."

THE BELLWETHERS

Company results that will set the tone for the coming months:
* Freightways: Monday, February 15
* Fletcher Building: Wednesday, February 17
* Mainfreight (3rd quarter): Thursday, February 18
* Tourism Holdings: Wednesday, February 24
* PGG Wrightson: Thursday, February 25