When is an earnings miss a hit? When it's Suncorp Group Ltd (ASX: SUN) it would seem.
The insurer posted weak interim cash earnings of $472 million yesterday, which was 8% below consensus forecasts, and that sent its share price tumbling 2.5% to $13.
But the stock has more than recovered those losses today as it jumped 2.6% in afternoon trade to $13.34 after Credit Suisse upgraded the stock to "outperform" from "neutral" in spite of the earnings disappointment.
Suncorp's weaker than expected profit result was primarily due to a poor showing in its Australian General Insurance business while its surprisingly high operating expenses is squeezing margins.
These are alarming points but Credit Suisse believes that the 1HFY18 results mark the bottom and that the only way is up for Suncorp from here.
"The roll-through of BIP [Business Improvement Program] can add 20bps to SUN's underlying margin (i.e. 10.4%) in 2H18. Further operational costs savings can add another 20bps and we then assume 50bps from loss ratio improvement," said the broker who has a $14.50 price target on the stock.
"On this basis SUN can achieve a ~11% underlying margin in 2H18 in our view. Further BIP benefits and pricing earn through should see SUN move back above a 12% underlying margin in FY19."
Suncorp's underperforming share price also helps the valuation argument. The stock has shed more than 10% of its value since it posted its full year results in August last year but Credit Suisse has resisted upgrading the stock till it can rebase its earnings.
The latest piece of earnings bad news and management's outlook commentary and guidance for FY19 indicate that this "reset" has happened.
Suncorp also looks very attractive when compared to rival Insurance Australia Group Ltd (ASX: IAG), whose share price has surged over 15% in the last six months.
As they say, everything has a price and now that management has committed to a group top-line growth of 3% to 5% and lowering its expense base to $2.7 billion from $2.9 billion in the first half (annualised), investors should give management the benefit of the doubt – at least for now.
However, there's no doubt that Suncorp is in the same camp as fast food chain Domino's Pizza Enterprises Ltd. (ASX: DMP), which has also promised a big near-term turnaround after posting a disappointing first half result.
If either company does not deliver on their promises, heads are likely to roll.
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