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5 companies with downside risks

With the end of financial year reporting season about to kick off, the Australian Financial Review has reported details of research conducted by broker UBS. According to UBS the FY 2013 consensus for earnings growth in 0% (yes zero!), while FY 2014 consensus is for an increase of 13.6%. As you might be able to guess, UBS thinks 13.6% is a stretch!

The UBS team is expecting downside surprises to outnumber upside surprises by a factor of 3-to-1 at the upcoming reporting season. So while there is a small list of upside surprise candidates, which includes Fairfax Media (ASX: FXJ) and Nufarm (ASX: NUF), there is a much longer list of potential downside surprise candidates.

Of the 21 candidates on the downside list, five that particularly stood out were:

  • Pallet pooling provider Brambles (ASX: BXB) which UBS states is facing “soft conditions in Europe and that cost out momentum may also disappoint.”
  • Despite a recent downgrade by beverage maker Coca-Cola Amatil (ASX: CCL), the broker believes that there is “still scope for full year guidance to disappoint.”
  • Computershare (ASX: CPU) is also facing soft industry conditions that “create risk for FY14 guidance.”
  • Sonic Healthcare (ASX: SHL), which the broker believes is facing global industry issues which are putting pressure on the revenue line.
  • Treasury Wine Estates (ASX: TWE), which has just issued a profit downgrade and released details of inventory issues could further disappoint the market, in UBS’s opinion, due to “result quality”.

Foolish takeaway

There is a good chance that in aggregate, most growth in 2014 will come almost solely from further cost cutting. Not only is this unsustainable but cost-cutting is also unlikely to deliver the double-digit expectations currently in the market.

This increases the likelihood that investors will downgrade their outlook for 2014 earnings as the August reporting season rolls on and could potentially provide a good buying opportunity for investors with a long-term time horizon.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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