The 2014-2015 financial year is rapidly drawing to a close and most companies now have an accurate insight into their full year result.
There will be numerous companies that exceed their earnings expectations and may see their share price push higher. In contrast, the companies that report profit downgrades amid weak earnings will often see their share price hammered by the market.
Worleyparsons Limited (ASX: WOR), McAleese Ltd (ASX: MCS) and MMA Offshore Ltd (ASX: MMA) all released early profit downgrades yesterday as the economic impacts of the resources and energy sector downturn hit home. All three stocks were sold off heavily after the announcements.
A recent report by Goldman Sachs expects S&P/ASX 200 businesses could see overall earnings downgraded by 2% for the second half of the 2014-15 financial year, indicating there will be more profit downgrades coming soon.
Potential earnings downgrades and upgrades
Fairfax Media recently reported the list of companies Goldman Sachs were expecting to have both an unusually strong second half and an unusually weak second half.
In summary, Goldman Sachs believes those most likely to report stronger earnings will be companies earning the majority of their revenue offshore which ties in with their US67c 12-month prediction for the Aussie dollar.
The companies most likely to report weaker than expected earnings will be some of the banks and companies in the resources sector.
How you can profit – offshore earnings exposure
Considering the long term outlook for a lower Aussie dollar, investing in companies with significant offshore earnings has been a key recommendation for quite some time. Below are companies from the list that deserve further research and could provide valuable growth in your portfolio this year.
Flight Centre Travel Group Ltd (ASX: FLT) has a huge Australian business but the international business is the key to future growth. International revenue will likely overtake the domestic revenue within the next few years and will propel the company to new heights.
Although the shares have climbed nearly 30% in the past four months after I recommended investors buy Flight Centre following a heavy sell-off, they still represent good value. Trading on a P/E ratio of only 17 and providing investors with a fully franked 3.5% dividend yield, the market has not priced in the bright international future of this company.
Cochlear Limited (ASX: COH) is the world's leading implantable hearing device producer with bright prospects ahead of it. More than 80% of total revenue is collected outside of the Asia Pacific area making this a truly global company.
15% of revenue is invested directly back into the company via research and development ensuring they will stay ahead of the competition into the future. Trading on a forward P/E ratio around 30 and providing a partially franked dividend yield of 2.8%, Cochlear is not a cheap company by traditional metrics. After a recent sell-off it is now 10% below its 52-week high and could offer a good entry point for long-term investors.
How you can profit – undervalued stocks
Sometimes, despite a great history of earnings and dividend growth, the market does not fully appreciate the potential of companies. I believe this is the case for the following stock, which was my top stock pick for May.
FlexiGroup Limited (ASX: FXL) is a company operating in the consumer finance industry. Despite achieving a compound annual growth rate of 14% and 16% in adjusted cash earnings and dividends over the past three years, the company is still selling at discount prices.
Analysts expect moderate earnings growth of 5-10% per year for the next two years indicating that the current 5% fully franked dividend stream will continue to grow. Currently trading on a P/E ratio of only 12.5 against the market average of 16.5, FlexiGroup provides investors the rare combination of growth and income at a good price.
Investors can also protect their profits by ensuring their portfolios are ready for the next stock market crash.
