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UBS names its winners and losers of next month’s earnings season

Investors are heading into one of the most exciting times of the year as ASX-listed companies gear up to hand in earnings report cards and outlook statements next month.

We will soon learn who has been swimming naked!

If you are looking to gain an edge over the market, knowing which company is likely to beat or miss market expectations will be key.

While experts are expecting a decent set of results, there is really nothing to get excited about with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) trading on a price-earnings (P/E) multiple of around 15 times and consensus tipping 7% earnings per share (EPS) growth – both more or less in-line with the longer-term average.

The forecast growth pales in comparison to offshore markets with UBS noting that the rest of the world is expected to deliver EPS growth of 10% this calendar year after generating 14% growth in 2017.

What’s more, growth sectors (such as healthcare) are trading well above their 10 or 20-year average multiples.

“With ‘growth’ rallying globally during the last (August) reporting period, the market shrugged off some underwhelming results,” said UBS.

“But with multiples higher and macro conditions turning against ‘growth’ somewhat, the market may not be as forgiving in February.”

The sector that the broker believes will see most of the earnings upgrades is resources thanks to the stronger for longer spot commodity prices.

Outside of resources, consensus earnings estimates are still being pared back, although at a benign pace of around 2% over the past six months, which is pretty much the norm.

Some large caps that the broker expects will deliver results ahead of market expectations include:

  • Ansell Limited (ASX: ANN): the glove maker could deliver an upside surprise through its cost-out program and improving global macro conditions.
  • Harvey Norman Holdings Limited (ASX: HVN): The furniture and electrical retailer is likely to beat consensus thanks to strength in household goods. Management may also surprise by announcing some capital management initiative, such as a share buyback.
  • Qantas Airways Limited (ASX: QAN): The airline operator has enjoyed strong loads and yields, which could drive earnings ahead of what the market is expecting. UBS also believes management will announce a capital management initiative that may be a combination of dividends and buybacks.

On the flipside, blue-chips that are most at risk of posting results below market expectations include:

  • Lendlease Group (ASX: LLC): The property and construction group had flagged issues on some construction projects and will likely provide further details that could disappoint the market, although quite a bit of bad news appears to be factored into its current share price.
  • Primary Health Care Limited (ASX: PRY): The medical services group may announce further costs from its restructuring as new management clears the deck.
  • Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC): The hospital operator is at risk of delivering disappointing growth for its Australian operations and new management may also be tempted to deliver bad news to rebase expectations.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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