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Part 2: Goldman Sachs names the potential losers this earnings season

With earnings season just about to kick off, Goldman Sachs has been busy running the ruler over a number of popular ASX shares in order to see which are likely to outperform expectations and which are likely to disappoint.

This morning I looked at the first group of shares that the broker believes are likely to disappoint in August. Here is the final group:

Aurizon Holdings Ltd (ASX: AZJ)

This rail freight operator is a company which Goldman Sachs thinks could disappoint during earnings season. It currently expects Aurizon to deliver volumes at the lower end of its 215-225mt guidance range. This could put it at risk of missing consensus earnings estimates.

Bega Cheese Ltd (ASX: BGA)

According to the note, the broker believes that the market is expecting too much from Bega Cheese in FY 2020. This is because it sees “headwinds on farm-gate milk production, particularly in northern Victoria which is a key collection region for BGA’s Tatura processing facility. This could impact processing volumes for BGA. The lack of production is also causing a price war from the milk processors as they scramble for milk in a falling production environment which could squeeze margins.”

Insurance Australia Group Ltd (ASX: IAG)

With its shares changing hands at 21x estimated FY 2020 earnings, Goldman Sachs believes expectations are elevated for this insurance giant. It notes risks to earnings which include a higher allowance, regulatory/compliance cost pressures, lower domestic interest rates, and lower reserve releases. Overall, it suspects its maiden FY 2020 guidance could disappoint.

Medibank Private Ltd (ASX: MPL)

Another company which the market could be overly optimistic on is Medibank. At 24x estimated FY 2020 earnings, it notes that the private health insurer’s shares are trading at their widest premium to the ASX 200 in a long time. This could be a bad mix given that it sees “scope for disappointment on 1) gross margins are likely to face pressure from the lower 2019 rate increase, 2) limited capacity for discussion on capital settings given the industry standard has not been released, 3) rising regulatory/compliance costs and a bias to growth to limit capacity for a major positive surprise on costs.”

Ramsay Health Care Limited (ASX: RHC)

Goldman Sachs believes this private hospital operator’s Australian business could underperform over the near term due to structural challenges. It explained: “We believe that the market is underestimating the current pressures to both RHC’s top-line and input costs from PHI premium increase, ongoing payor negotiations, and system volume growth. Whilst payor pressure is likely less steep without a mandated 2% premium cap, the structural issues prevailing prior to the election result must still be addressed, and we expect continued price/mix erosion through the mid-term from ongoing payor negotiations.” In light of this, it believes earnings growth for FY19-22E will remain muted at ~5% CAGR but consensus continues to forecast an 8% EPS growth.

Whilst those may be the shares tipped to disappoint, these quality shares could surprise to the upside next month.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Insurance Australia Group Limited. 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 Scott Phillips.

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