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Is Cimic’s 19% share price plunge a reporting season warning?

The Cimic Group Ltd (ASX: CIM) share price plunged 19% lower yesterday after the company released its full-year results – but could this be a pre-reporting season warning?

What were Cimic’s results highlights?

CIMIC reported stable revenues of $7.0 billion for the half while also maintaining its earnings before interest and tax (EBIT) and net profit after tax (NPAT) margins at 8.2% and 5.3%, respectively.

The company’s $367 million profit is a minor year-on-year (YoY) increase, up from $363 million reported in 1H 2018, while operating cash flow was flat at $1.8 billion.

According to a note out of Goldman Sachs, CIMIC’s profit result was 7% below its estimates.

The weak result was driven by a reasonable decline in construction revenue and margins, which offset a positive performance from its mining services business.

CIMIC’s earnings before interest, tax, depreciation and amortisation (EBITDA) cash conversion rate came in at 87% and overall investors were disappointed with the limited growth shown in the company’s earnings numbers.

What does this mean for the rest of reporting season?

With the August reporting season just around the corner, I think investors should be wary of the reaction to CIMIC’s full-year results.

Despite decent underlying numbers, CIMIC’s numbers missed market expectations by quite some margin and investors showed that they’re willing to sell if signs of slowing growth are there.

While CIMIC operates in the engineering and construction sector, which is known to be particularly volatile and operate on smaller margins at the top of the cycle, I wouldn’t be surprised to see some share price turbulence as we head into the ASX reporting season.

The S&P/ASX 200 Index (INDEXASX: XJO) enjoyed its best 6-month start to the year since 1991 in 2019 and we’ve seen valuations rebound strongly from a weak finish in the second half of 2018.

Of course, this could be the result of a market correction to appropriate intrinsic values but also shows signs of a heated market where one slip can see a strong reaction from investors heading out the door.

I’d be carefully watching the Consumer Discretionary stocks in particular, which are usually to first to see slowing growth in times of economic slowdowns due to the cyclical nature of their earnings.

In particular, I’d be looking at high flying stocks in the sector like Breville Group Ltd (ASX: BRG) and tech stocks like Appen Ltd (ASX: APX) for leading indicators of slowing growth in the market this reporting season.

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Motley Fool contributor Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Appen Ltd. 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 Scott Phillips.

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