Earnings season is on so take note. Share prices can swing wildly based on current and forecasted earnings results.

This season there are three key trends to consider, and the first is the decline in the Aussie dollar.  Since this trend is relatively recent its impact on earnings will be seen in forward guidance numbers.  Any ASX listed company that generates foreign earnings will stand to benefit. A recent Bureau of Resources and Energy Economics (BREE) report claims the declining Aussie dollar could increase the value of Australian exports by 11%.

The second is the hunt for yield.  The RBA has cut the cash rate to an all time low, and further cuts are not out of the question.  Investors should seek companies with increasing dividends paid from revenue growth, not just from cost-cutting measures.  On 23 April, 2013 Woodside Petroleum (WPL) announced a new dividend policy including an increase in the company’s payout ratio and a special dividend as well.  Within two days Woodside’s share price increased from $34.6 to $38.74.

The third trend of note is the mining slowdown.  Falling commodity prices have seen significant cutbacks and a contraction in a sector that has propelled the Australian economy for a decade.  Beware that trends have a way of dragging down the strong as well as the weak, creating buying opportunities for fundamentally sound companies.

One of the first companies out of the gate this earnings season could be such an opportunity.  Mining services provider Downer EDI Limited (DOW) surprised the market, reporting revenue at $8.4 billion up from $7.9 billion a year ago; net profit jumped 80.9% to $203.98 million from $107.51 million; and earnings per share almost doubled from $0.237 to $0.457.  A 5 day price chart tells the story:

In the coming weeks four more of the largest resources and energy service providers on the ASX will report earnings.  All have market caps over a billion dollars, with Leighton Holdings (LEI) the largest at $5.45 billion and WorleyParsons (WOR) close behind at $5.25 billion.  The following table lists share price changes and key valuation and performance metrics for all five companies:

Company (Code)

Share Price

52 Wk % Change




Forward P/E (2014)

5 Yr Expected P/EG

2 Yr Earnings Growth Forecast

Div Yld

Leighton Holdings (LEI)










Worley Parsons Ltd











Downer EDI Ltd (DOW)










Monadelphous Group (MND)










UGL Limited











By most measures Downer is the standout.  Downer is trading close to book value and has the most attractive combination of current valuation measures and forward growth estimates on a 2 and 5 year basis.  Major analysts seem to agree as Downer is the only company to earn BUY, OVERWEIGHT, or OUTPERFORM recommendations from BA-Merrill Lynch, CIMB Securities, Citi, Credit Suisse, Deutsche Bank, JP Morgan Chase, Macquarie, and UBS.  

Analysts at both CIMB Securities and Macquarie label Downer as the one “stand out” in the mining sector.  Citi and BA-Merrill Lynch like the stock on valuation grounds.  Large companies like Downer and the others in the table are diversified, providing a range of services to multiple sectors including resources, energy, and infrastructure.  Downer also benefits from infrastructure spending. 

Leighton Holdings (LEI) is a diversified services provider with a complex organisational structure; multiple subsidiary companies operate across a wide variety of sectors such as an airport link in Brisbane and a desalinisation plant in Victoria.  The company is also highly diversified geographically, with projects in 25 countries throughout Asia, Africa, and the Middle East. In theory, such diversifcation should shield the company from any slowdown in the mining sector, but this only holds true if the company executes well.  Cost overruns at the Brisbane and Victoria projects hurt not only Leighton’s bottom line, but also its reputation.  Leighton announced positive Q1 earnings on 06 May, despite having lost mining contracts from both BHP Billiton and Xstrata.  Additionally, management reaffirmed its prior full year guidance for 2013.  The company sold key telecommunications assets to shore up its balance sheet and achieve its forecasted reduction in gearing from 35% to 25%.  The underlying profit number to watch for in the earnings release should fall between or above the forecasted range of AUD$520 million to AUD$600 million.

In the short term Leighton’s prospects may be a bit risky but a 2 year earnings growth forecast of 16.7% and a 5 year expected P/EG of 1.73 are attractive.  In mid July Commonwealth Bank reiterated a BUY rating on Leighton, but none of Australia’s major analyst firms agree.  The most recent recommendation came for Deutsche Bank, upgrading LEI from SELL to HOLD.  Leighton has taken its shareholders on a rocky ride over the past year, as the following chart shows:

Worley Parsons (WOR) lowered its 2013 earnings forecast on 16 May 2013, citing lower resource spending in Australia and Canada.  The stock dropped about 14% to $19.20 in an intraday response but has rebounded since.  Here is the company’s one year price chart:

WorleyParsons operates in four business segments – Hydrocarbons; Power, Minerals, Metals and Chemicals; and Infrastructure and Environment.  Revenues reported in the 2013 Half Year Results showed Hydrocarbons as the largest contributing segment with $2.6 billion in sales versus only $481 million in the Minerals and Metals segment.  As Australia’s largest oil and gas engineering company, Worley is less susceptible to the slowdown in the mining sector and its large offshore exposure in oil and gas should benefit from the lower dollar.  The revised guidance is the number to watch in the upcoming earnings release on 14 August – underlying earnings between or above AUD$320 million and AUD$340 million.  

Macquarie, Credit Suisse, and CIMB Securities all maintained OUTPERFORM or BUY recommendations on WOR following the release of the downgraded forecast.  All three cited Worley’s oil and gas business to support their recommendations.

Monadelphous Holdings (MND) and its long term shareholders cashed in on the resources boom with investors seeing 38.4% total shareholder return on an average annual rate.  For investors purchasing the stock one year ago, the total return is a negative 11%.  On 19 February 2013 the company reported record Half Year results.  Net profit after tax (NPAT) rose 37.5%; revenue increased 46.6%; earnings per share (EPS) increased 35.5%; and the stock price dropped from $25.51 to $22.96 the day after the report.  Here is a six month price chart for MND:

MND management expects Full Year 2013 revenue growth of approximately 35% and believes the $1 billion in new contracts awarded to date can sustain growth into 2014; beyond that date is uncertain; new project approvals in the energy and resources sector are uncertain as MND customers look to reduce capital expenditures and control costs.  MND margins are under pressure and the outlook for 2013/2014 may be stable but revenue growth is uncertain.

CIMB Securities is bullish on MND. Deutsche Bank, JP Morgan, Citi, UBS, and BA-Merrill Lynch are not; all have SELL or UNDERPERFORM ratings on MND.  

UGL Limited (UGL) is another broadly diversified services provider, operating in four sectors – UGL Resources; UGL Infrastructure; UGL Rail; and UGL Services.  One of the company’s subsidiaries in the services segment, DTZ, is in itself a global leader in property services and facilities management.  On 15 May 2013 UGL lowered its Full Year 2013 earnings guidance to a range of $90 million to $100 million – a stunning 40% drop from previous guidance.

In the announcement management acknowledged that the lowered guidance was a result not only of slowing capital expenditures in the mining sector and elsewhere throughout Australia, but also due to project underperformance in the Power segment.  Management announced further organisational restructuring and cost-cutting while assuring investors its Property division will continue to outperform. Here is a six month price chart:

Deutsche Bank maintains a BUY recommendation on the stock based on the company’s growing exposure to the global property market as well as a strong base of recurring revenue.

Deutsche Bank’s outlook serves as a reminder to investors expecting the worst from all mining services providers that not all providers are equal.  In UGL’s case the company expects property sector revenue to account for 50% of total revenue in a few years. 

In sum, given the steep decline in share price over the last six months, any positive news on forward outlook could give these stocks a bounce.  Leighton Holdings and WorleyParsons report on 14 August with UGL up on 12 August and Monadelphous on 20 August.

Click on the links below to read other articles from this week’s newsletter

1. Take Profit – Why A Global Sell Off is Likely: Medium-term outlook still good, but global…

2. 5 Defensive Stocks For Nervous Nellies: A federal election result can’t come quick…

3. 18 Share Tips – 12 August 2013: 18 Share Tips to BUY, SELL & HOLD from…

4. 5 Mining Services Stocks To Watch This Earnings Season: This earnings season there are three key trends…

5. Property bubble? That’s the theory, anyway: As Australian housing prices have boomed over…

6. Silver shorts hit record extremes, short squeeze looms: Silver has suffered a miserable year so far…

7. Dow Jones Index to 68 points?: President Obama has decided to modify the…

8. Top 10 shorted stocks: Each day we feature the top 10 shorted stocks…

9. Stocks on a roll: ASX rolling 52-week highs for the previous…

10. Stocks on the slide: ASX rolling 52-week lows for the previous…


Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.