Interim profit releases scheduled for Wednesday, 12 February may affect the share prices of the following two companies.
Commonwealth Bank (ASX: CBA)
Commonwealth Bank retains its mantle as Australia's highest-rated bank due to its above-sector returns and its leadership in IT development. It has the number-one position in home lending and retail deposits.
Broking analysts will be forced to alter their current forecasts should there be any significant variance from consensus numbers. Consensus for net profit after tax, earnings per share (EPS) and the dividend are expected to be $4.1 billion, $2.54 per share and $1.81 per share respectively.
Many commentators are suggesting that Commonwealth is trading above fair value and the positives are already factored into the current price. These positives include signs of life in the domestic economy, a reduction in bad debts, leverage to wealth management and an eventual east coast economic recovery.
One potential headwind to look for is negative commentary on impending regulatory changes and the impact this will have on return on equity (Commonwealth is the most impacted of all the banks). Another is the effect of being more exposed to lower interest rates than Westpac Banking Corporation (ASX: WBC), National Australia Bank (ASX: NAB) or ANZ Bank (ASX: ANZ). Finally, Commonwealth has benefited from being overweight in mortgages and underweight in corporate lending. Will this tailwind become a headwind?
Stockland (ASX: SGP)
Stockland is a diversified property group that develops and manages residential communities, retirement living villages, retail centers, office buildings and industrial sites.
Earnings are expected to be skewed toward the second half of the financial year. The full year consensus numbers include $546 million net profit after tax and EPS of 23.4 cents.
A positive surprise may occur as operating profit margins are recovering in the residential business, which accounts for 54% of total group revenue.
One potential downside risk is a disappointing performance by the retail portfolio due to subdued long-term growth in retail sales and rents. In a December trading update, retail sales were showing signs of improvement, so commentary about the effect of Christmas trading across its portfolio will be important. Another downside risk would be a sluggish development pipeline in Stockland's industrial division, which management considers a priority for the group.
Alternatively, if one adopts the view of broker Morgan Stanley, we may be able to ignore the pending results. Regardless of FY2014 earnings, they expect FY2015 to be a strong year with forecast EPS growth of just under 10%.
Foolish takeaway
The price set for individual stocks is largely determined by consensus expectations formed by the broking community. Generally, those expectations are garnered from the company, which has an obligation to keep the market informed.
However, the most likely time for those expectations to be amended is during the profit reporting season. This may be due to the current years' consensus being incorrect or company outlook statements suggesting that forecasts will need to be changed.
