Earnings season can play havoc with the value of your stock portfolio, and for this reason it can be a nerve-wracking time for investors. On the other hand, earnings season is a moment of truth in an industry plauged by misinformation and market hype.

On Thursday, the ASX saw its biggest rally in two weeks following a string of better than expected earnings. Some of the rally was attributed to investors yanking money out of bonds and shovelling the money into high-yielding equities. Sydney based UBS managing director George Kanaan witnessed a big move in bonds. “It looks like the money is flowing into equities,” he reportedly said.  With Chinese inflation slowing, the possibility of further monetary policy stimulus in China was another factor driving the market’s rally.

While big name players Wesfarmers (WES) and Commonwealth Bank of Australia (CBA) stole the headlines this week, three of Australia’s least-loved stocks reported fairly favourable results.  Here are the three, with price history and a few current valuation ratios:

 

Code   Price   Hi Low Chan
ge
P/E
NCM $24.51 $41.18 $20.99 -35% 12.71
JBH $9.65 $16.82 $7.83 -43% 9.09
CRZ $7.15 $7.30 $4.43 50% 18.95

 

Newcrest is our largest gold miner – with a share price consistently lagging the price of gold.  JB HiFi (JBH) and Carsales (CRZ) have landed a spot in the ASX Top 10 Most Shorted List for well over a year. 

Newcrest (NCM) closed on the Friday before earnings at $24.33.  Its share price has been reasonably bouyant since the company’s positive quarterly production report released in mid July.  Here is a one-year share price chart for NCM as of 16 August 2012, two trading days after the company’s 13 August earnings release:

It’s a bit difficult to see an intraday move on a one-year chart, but the share price shot up roughly 4.5% to an intraday high of $25.40 in response to better than expected earnings.  While a Bloomberg consensus estimate from 11 analysts expected net income of A$1.09 billion, the actual result was A$1.12 billion – amounting to a healthy 23% increase over FY 2011 net income of A$908 million.  Earnings per share of A$1.46 beat analyst estimates of $1.39.

Look back at the price chart and you may wonder what happened to the love a mere two days after the release; the share price fell back to $24.38, just $0.05 higher than the pre-release closing price.

Although profits were up, revenue from gold sales of 2.333 million ounces in 2012 were actually 6% lower than in FY 2011, which the company attributes to a 10% drop in gold production.  The income rise comes primarily from the higher realised gold price, averaging A$1609 per ounce for the year – a 17% increase in price.  But the real caveat with NCM’s earnings was cost.

One plausible explanation offered for the variance between the price of gold and the share prices of miners producing the gold is the costs of production, exploration and expansion.  Input costs such as labor, fuel, and materials are rising, sharply increasing margin pressure on the gold sector.  Miners are experiencing substantial cost overruns on new projects.  According to Macquarie, Aussie gold miners are looking at 20% increases in their original capital expenditure cost estimates.

Newcrest is one of the lowest cost gold producers, but even they announced a 9% increase in the cost of sales, reaching A$2.6 billion for FY 2012. 

Some warn gold mining costs could double in as little as five years. 

On top of the cost concern there’s Newcrest’s rising debt to consider.  The company’s total debt is A$2.17 billion, a year over year increase of $1.56 billion with gearing of 12.5%. 

Carsales.com (CRZ) has been defying short sellers for months as the shorts keep shorting and the share price keeps advancing up the chart.  Carsales.com is our number one Internet source for classified advertising for cars, motorbikes, and boats; and the company offers a variety of services to dealers as well.  Here is a one year share price chart:

The chart tells the story before we even look at the numbers – the share price jumped 20% as every metric Carsales.com reported was up year over year. 

In FY 2011 Net Profit after Tax (NPAT) was A$58.3 million and for FY 2012 NPAT climbed 23% to A$71.6 million.

In FY 2011 operating revenue was $152.5 and for FY 2012 it rose 21% to A$184.2 million.

In FY 2011 Earnings per Share (EPS) was A$0.25 and for FY 2012 EPS increased 23% to A$0.306.

In FY 2011 Net Operating Cash Flow was A$60.1 and for FY 2012 it vaulted 23% to A$74.2.

To sweeten the deal for loyal shareholders the company announced a special fully franked dividend of A$0.06 per share on top of its regular dividend of A$0.132 per share, also fully franked. 

Some analysts have also maintained NEUTRAL ratings despite the good news. Some think all good news is already priced into the shares at current valuation. Note from our table the company’s forward P/E is 18.95, which is not that outrageous for a growth stock. 

Prior to its 13 August 2012 earnings release beaten and bloodied JB Hi Fi (JBH) had a 21.2% short interest as reported to the ASIC. A weakening retail outlook and cutthroat competition meant that JB Hi Fi’s margins were getting squeezed. However, the one-year price chart for JBH shows a 5% jump in the share price as the shorts ran for cover:

JBH closed at $9.22 on 10 August 2012 and after the release on 13 August the closing price was $9.79, having reached an intraday high of $9.90.  In reality, the numbers weren’t great; they simply weren’t as bad as many anticipated.

On the positive side revenues were up 5.7%, from A$2.96 billion in FY 2011 to A$3.13 billion in FY2012.  From here, we go downhill. 

NPAT (Net Profit after Taxes) dropped 22.1%; from A$134.4 million in FY 2011 to A$104.6 million in FY 2012.

EPS (Earnings per Share) slid 15.1%; from A$0.1247 in FY 2011 to A$0.1059 in FY 2012.

Gross Margins fell 94 bps (basis points) from 22.1% in FY 2011 to 21.1% in FY 2012.

Cost of Doing Business (COBD) rose 43 bps from 14.5% in FY 2011 to 14.9% in FY 2012.

Company management says things are getting better even though conditions are still “extremely challenging.”  JBH is adding 16 stores to its current total of 168 in 2013 with a goal of 214.  Management is set on boosting market share as Woolworths plans to close and sell its Dick Smith electronic stores. 

Online sales were up 77.3% and same store sales, which fell 3.1% in the first half of FY 2012, were only down 0.1% in the second half.  Note that JBH’s online sales currently represent just 1.6% of total revenue.  A new online platform is under stgelopment. 

Guidance was upbeat with a forecast for revenues of A$3.3 billion; a 5.5% increase over FY 2012.  Regarding their slim margins management presented some statistics from Morgan Stanley showing than Amazon has a COBD of 20.6% and US electronics giant Best Buy stands at 20.4%, which makes the 14.9% at JBH look quite solid.

The analyst community is decidedly mixed on the future of JBH with Citi advising investors to SELL in anticipation of another 3 years of earnings and margin declines. 

Next week is the biggie for earnings season. A total of 87 major companise are set to report, with the likes of BHP, Bluescope, Amcor, Oil Search, AGL, Coca-Cola, CSL, Woodside, Fortescue, IAG and Woolworths.

Less than stellar performance from the following three companies this year, may provide some surprises. 

 Company

 Code

Share Price

52 Wk Hi

52 Wk Lo

Year over Year % Change

Forward

P/E

5 Yr Expected P/EG

TTM

P/S

BlueScope Steel  BSL

 $24.51

 $41.18

 $20.99

 -40%

 12.71

 .85

 4.16

Seven West Media  SWM

 $1.50

 $4.10

 $1.40

 -48%

 4.44

 10

 0.68

Woodside Petroleum  WPL

 $34.82

 $29.76

 $38.16

 -8%

 13.01

 1.21

 5.84

 

It’s hard to believe at the onset of the GFC, BlueScope Steel was trading at $7.00. Here is a five-year price chart showcasing the dramatic fall from grace:

BlueScope Steel is our largest steel maker, which has reeled from the impact of a high Aussie dollar (imported steel is now comparatively cheaper for use in domestic construction projects).  The company has pre-announced a profit warning, stating an anticipated net loss after tax of approximately A$1 billion.

It is hard to tell from a five year price chart, but a 34% jump in share price accompanied the announced joint venture with Japanese steelmaker Nippon Steel.  BlueScope will sell half of its Asian and North American holdings to Nippon for US$540 million.  The deal should cut their debt close to zero.

Any positive news from BlueScope’s earnings report could move the share price, especially if management unveilsnew information surrounding the joint venture. BA-Merrill Lynch, Macquarie, and Deutsche Bank place BUY or OUTPERFORM ratings on the company, largely because of the Nippon deal.  Here is its one-month chart:

Seven West Media (SWM) operates in newspaper and online digital publishing, television and radio broadcasting.  In early July they announced a share offering that reduced their refinancing risk.  Both UBS and RBS Australia upgraded SWM to BUY following the capital raising.  The company recently raised their earnings guidance for FY 2012, but anything short of this will not be taken lightly.  Here’s its one-year price chart:

Woodside Petroleum (WPL) has had a bad year, but a great month.  Here is its one-year price chart immediately followed by a one-month chart:

Woodside is our biggest player in the Liquefied Natural Gas (LNG) space; cost overruns and production delays associated with getting its first LNG production facility, Pluto, up and running, has not been kind to its share price.  Pluto went online in April and the WPL July quarterly production report showed stronger than expected production; unsurprisingly, the share price went up. 

Woodside has already raised its production forecast by 14% since Pluto is running at 80% capacity, much higher than Woodside’s own forecast of 36% capacity in the first quarter of operation.  Any additional positive news on  the Pluto LNG will be good news for the share price.  In addition, watch for a special dividend because of the Pluto success. 

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