6min read
PREVIOUS ARTICLE China heads for price on carbo... NEXT ARTICLE CEO pay study shows how much A...

The sharemarket can be an unforgiving beast. Miss expectations or consensus forecasts and a company’s share price is pummelled. Exceed forecasts and the share price may fall because next year’s outlook doesn’t look as good as the performance of past 12 months. Alternatively, a company’s share price may rise on the back of a dreadful year because the future appears brighter.

Today, analysts put forward five stocks they say disappointed the market during reporting season and examine their prospects.

ResMed (RMD)

Chart: Share price over the year versus ASX200 (XJO)

Makes medical devices to treat sleep disordered breathing. Michael Gable, managing director of Fairmont Equities, says the company reported flat sales of $US415.2 million in the 2014 fourth quarter, representing a 1 per cent decline in constant currency terms on the prior corresponding period. Consensus sales estimates for the fourth quarter were around $US430 million. As a result, the market showed its disappointment by selling the stock down by more 3 per cent on the day.

However, on a full year basis, revenue rose by 3 per cent to $US1.55 billion. “Accordingly, we have been more than happy to continue holding RMD in our model portfolio,” Gable says. “ResMed remains a high quality business with excellent growth prospects, and several factors support the view that investors are likely to look through fourth quarter revenue weakness.”

Gable says the company manages its costs effectively, particularly given weaker sales of flow generators and masks in the US. Expected revenue growth should help retain margins and underpin earnings growth. A stronger US dollar will also be of benefit.

“The stock recovered after that earnings disappointment,” Gable says. “Any further dip in the share price presents a buying opportunity. The shares finished at $5.67 on September 24.

BlueScope Steel (BSL)

Chart: Share price over the year versus ASX200 (XJO)

Janine Cox, of Wealth Within, says the steel company survived the GFC, but its share price performance in recent months shows it’s still battling to weather the aftermath of that storm.

Cox says after tackling the challenges of a high Australian dollar and cheap Chinese imports, BSL delivered an underlying profit of about $112 million in financial year 2014, just below market forecasts of around $122 million. However, net loss after tax was around $82 million, $27 million better than the prior period. Cox says the market was looking for improvement and a sign that dividends will return, which isn’t looking likely any time soon.

She says a perception exists that BlueScope will again disappoint in six months. A sustainable recovery in the share price requires a major surge in housing construction in coming months. Factoring in a lower Australian dollar is unlikely to be enough.

“The BSL board needs to come in well above expectations next year to avoid further share price carnage,” Cox says.

She says until the share price breaks back above $6.20, the next moves are more likely to be down. A fall back below $5.34 is an indication that further declines are ahead. The shares finished at $5.53 on September 24.

Myer Holdings (MYR)

Chart: Share price over the year versus ASX200 (XJO)

The department store giant faces its fair share of challenges, according to equities analyst James Samson, of Lincoln Indicators. Full year 2014 sales of $3.1 billion were marginally lower than in 2013, mostly due to heavy discounting. Samson says this led to a 24.13 per cent fall in net profit to $98.542 million, which was below market expectations and indicates Myer is struggling to defend margins in a competitive retail market. Following the report, shares in Myer fell from $2.47 on September 10 to $2.15 on September 11. The shares closed at $2.01 on September 24.

“However, there’s still value in the business, as it’s in strong financial health, generating positive profits and cash flow,” Samson says. “The problem for management is the trend in earnings. To stem the tide, management need to focus on the customer offer, market relevance and ensure margins aren’t compromised.

“Competitors in the apparel space, such as Premier Investments, have shown what can be achieved through effective brand management and offering value.”

Tatts Group (TTS)

Chart: Share price over the year versus ASX200 (XJO)

Joshua Stega, director of JAS Wealth, says a softer than expected performance in lotteries in fiscal year 2014 left Tatts missing his expectations. He says the lotteries business accounts for about 65 per cent of earnings. Tatts reported lotteries revenue of $1.923 billion, a 4.3 per cent decline on last year. Stega was expecting revenue of $2.036 billion. He says wagering revenue fell 2 per cent to $642.3 million, which was below his forecast of $651 million. The final dividend of 5.5 cents a share also fell short of Stega’s expectations of 7 cents. Stega believes cost of living pressures contributed to the decline in revenues.   

“Tatts operates in the highly regulated gaming industry and while revenues are usually stable, growth can be difficult to generate and forecast,” he says. “In this industry, investors should expect some years to disappoint and 2014 happened to be the case.  

“Tatts needs to keep focusing on marketing initiatives to ensure it secures a larger proportion of the gambling wallet when the purse strings do loosen up.” The stock closed at $3.16 on September 24.

JB Hi-Fi (JBH)

Chart: Share price over the year versus ASX200 (XJO)

Ken Bloomfield, chief executive of Financial Clarity, says the consumer electronics giant had a good 2013 by shaving costs to meet the challenges of slowing retail environment. However, he says, its 2014 result was marginally disappointing, particularly from a cash flow perspective. Net cash flow from operations was $41.3 million compared to $156.4 million the prior year. Bloomfield says even after allowing for adjusted cash flow of $131 million due to creditor payments falling into the next financial year, it didn’t stop investors punishing the company’s share price.

The good news was a better than expected full year dividend of 84 cents versus consensus of 79 cents.  

“If JB can push its cost base down again, then the stock seems like decent value with a 2015 consensus price/earnings multiple of just below 13 times and a fully franked dividend yield of 5 per cent,” Bloomfield says.

“Given track JB’s track record of responding and adapting to challenges, we wouldn’t be selling the stock, particularly coming into the usually strong Christmas season. But there’s no rush to be buying just yet.” The shares finished at $16.13 on September 24.

>> BACK TO THE NEWSLETTER: Click here to read other articles from this week’s newsletter


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.