Earnings Forecasts Forecast rebound in earnings premature, say strategists

Despite an aggressive paring of earnings and dividend expectations for fiscal 2009, which ends this June 30, strategists say expectations for fiscal 2010 will have to be downgraded because of the top-down impact of the global economic crisis and looming domestic recession.

“The analytical world is working out that its forecast second-half (of 2009) earnings rebound is premature,” says Southern Cross Equities director Charlie Aitken. “We expect to see solid consensus downgrades to 2009 and 2010 earnings estimates over the next few weeks.”
Two years into the worst global financial crisis since the Great Depression, the macro-economic environment is having an over-riding influence on the corporate landscape.
Australia's economy, which many thought could ride out the worst of the economic storm, has deteriorated quickly in recent months.

Mr Aitke says most analysts haven't experienced anything like this.
“The speed of deterioration is unprecedented and that is seeing analyst forecasts lag the reality of the earnings and margins decline,” he says.
Traditional equities analysts rely heavily on what companies say. But companies have been in most cases unable to predict the severity of the current financial and economic crisis.
Indeed, in the current earnings season, which is drawing to a close, many companies have said that the outlook is too uncertain for them to provide guidance on future earnings.
Strategists, on the other hand, have looked at the impact of past recessions on aggregate earnings and dividends - although there are precious few comparisons to the current period.

Macquarie Private Wealth associate director David Halliday expects equities to remain under pressure because, from a top-down perspective, it is hard to forecast any significant expansion in margins, or growth in earnings and dividends while the economy continues to weaken.
Macquarie strategists say the aggregate market forecast of its analysts implies fiscal 2010 market earnings per share growth of 1 per cent, representing a “hockey stick” turnaround from the implied fiscal 2009 forecast of an 8 per cent fall in EPS.
But the forecast of a turnaround, based on improved margins in 2010, is “a heroic assumption given the severity of the global recession”, the strategists say.
“There remains some distance to travel before bottom-up EPS growth forecasts resemble the typical recession profile of minus-20 per cent EPS growth for two years running,” they say.
Macquarie strategists say stabilisation of EPS growth forecasts will be critical for any sustained recovery in the overall market, yet they see a high risk of EPS forecast downgrades.
Citi strategists say Australia is “currently experiencing the weakest period of earnings revisions (by analysts) on record”.
Earnings downgrades are outnumbering upgrades by a ratio of more than 5 to 1, they say.

Citi analysts’ bottom-up forecasts imply average EPS growth in 2009/10 of around 1 per cent. But their strategists don't believe a 2010 recovery in earnings fits with their macroeconomic view.
“We are of the more bearish view that there will be no V-shaped economic recovery and that GDP growth will remain sub-trend for a least another two years,” says Citi. “By ruling out the possibility of a V-shaped economic recovery, it follows that the earnings profile for equities also needs to be pushed out longer and flatter.”
Citi lists 36 major companies where it feels caution is warranted because of a consensus for earnings growth that appears high relative to what it believes the operating environment will allow.
Aside from earnings, the other main trend has been dividend cuts and capital raisings as companies move to shore up their balance sheets.
Macquarie's analysts have witnessed 37 negative versus 15 positive dividend surprises so far this earnings period.
Mr Aitken says he has no faith in prospective dividend yields as companies move to protect their balance sheets by raising equity and cutting dividends.
“In a deteriorating global and domestic economy, we believe broker GDP estimates are too optimistic.”
Aitken says “high prospective yield equals high risk”.

In other words, prospective yields are high because share prices are under pressure, the implication being that high yields might not compensate for capital risk.
Furthermore, he believes bank dividend yields, which contribute a big portion of the overall market's dividend yield, are under “serious threat”.
ANZ today became the first of the country's four major banks to forecast a fall in dividends, which it said could drop by around 25 per cent this fiscal year.
“The Australian economy has only just entered a major downturn, and probably a recession, and if history is any guide, dividends will be cut sharply across the board as (companies) hoard cash,” says Aitken. “I believe the current prospective market dividend yield is a mirage.”


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