Monday, July 20, 2009

August - October reporting season should sort out fact from market fiction

The looming New Zealand reporting season that rolls out at the beginning of August is going to be a very good differentiator of fact from fiction.

Has our stockmarket got it right with its wild mood swings and huge markdowns in stock prices for most of our listed companies or has it gone way off track as usual and over reacted to the incessant bad news about the economy and some companies that have had particularly bad recent results and a large number that have had profit warnings?

I tend to err on the side of over reaction.

One stock in the Share Investor Portfolio that has been particularly hard hit over the last few months in terms of share price, Sky City Entertainment Group [SKC.NZ], didn't really participate in the recent upswing in stock prices across the board but its profit is going to be inline with last years result and its market update earlier this year - as it has been for the last 2-3 years when its share price was more than double its current levels. Go figure. Its share price was up 10c this last Friday at market close, on very large turnover, indicating that the result coming out late in August might be even better than indicated.

As investors and market watchers, we already know which companies are likely to underwhelm. The retail market sucks a kumera ; The Warehouse Group [WHS.NZ] , Pumpkin Patch Ltd [PPL.NZ] and Hallenstein Glasson [HLG.NZ] are going to disappoint the market, and that is clear if you just walk around the malls and ask your friends what they have been buying lately, but their respective stock prices have either been steady or up slightly in the last few months. Companies such as Contact Energy Ltd [CEN.NZ] and Goodman Fielder[GFF.NZ] have forecast lower profit this reporting season but their share prices have maintained relative value. Most export related businesses are suffering except for a notable one of two which are doing better than ever -like my own Fisher & Paykel Healthcare [FPH.NZ]. In comparison to Sky City's good February results, this shows little good judgment when it comes to picking companies with good medium term future profits when you look at what value Mr Market puts on them.

A stock that has simply rocketed in share price over the last few months is Restaurant Brands Ltd [RBD.NZ]. That has been an over reaction to a claw back to profit for the fast food operator where its share price has almost doubled from its early 2009 lows in the 50 - 60c range. Clearly this sort of stock movement is a major departure of fact from reality - its profit is no higher than it was 10 years ago and forecasts show only a small rise in profit from current levels, but the market has forgotten the poor financial history of this company and given the stock price a Viagra like status when it comes to valuing what the company is worth.

Telecom New Zealand's [TEL.NZ] stock price seems to have accelerated in share price of late but all indications are that profit is going to be well down on last year and a sense of uncertainly has enveloped company operations because of regulatory and economic restraints and the expense of rolling out their new XT mobile service. Will the market react in a realistic way when the bad bottom line figures finally surface in their accounts in August?

Ahh but you forget about Telecom's big dividend Darren! Attractive to international market watchers and Kiwis alike. Yeah OK, but how long can that last.

Reporting season is always a good way to sort the wheat from the chaff- if you can understand most of the gobbledygook in company reports - and this coming reporting season will be more relevant to that mantra than any other year in recent memory simply because of the economic uncertainty that currently prevails but the time for some caution should come now, when deciding to buy stocks. It looks to me that some are piling into stocks simply because they see stock prices rising and that isn't a clever way to buy, especially in a beaten down market.

I have been buying recently but not all stocks should be bought because they appear to be "on sale". I bought for my own reasons because I consider them cheap and good companies.

I bought more Michael Hill International [MHI.NZ] and Auckland International Airport [AIA.NZ] recently because I like the good management of the former and the monopoly status of the latter.

The stock prices of these two are interesting. Michael Hill's is probably trading at fair value given the dire nature of the retail industry, especially for discretionary stuff like jewelery (I saw nobody in my Albany MH on an otherwise busy retail day last week and they were offering free coffee) but Airport shares are trading at a heavy discount to value given that looming profit will only be slightly down from last year. The yang to that particular ying is that less than two years ago the Canadians and the Arabs offered over NZ$3.65 per share to buy the company, probably then overvaluing the company based on similar profits to this years one.

In my not so humble opinion Auckland International Airport is worth way more than $3.65 per share in the long term, (5 years plus) see monopoly status again for an explanation of that exuberant statement.

Yes, it is a good time to buy stocks because company share prices are on sale but fundamentals still do apply and it is worth looking even closer today than usual because of the x factor of the economic downturn. The reporting season will tell us if we have been right over the last 6 months, at least in the short to medium term, rather than betting on market whims.

I have only a short market experience (around 12 years) but now more than ever the disconnect between the current profit, future prospects and health of our NZX listed companies and its sharemarket value is more pronounced - and that occurred when the market over accelerated in the earlier part of this century as well. Some companies are being way under valued and vice versa.

I guess that is what makes this game interesting, but the rules will change as the profit season reveals its hidden cards.

Disclosure I own SKC, FPH, HLG, AIA, MHI, WHS, PPL, & GFF shares.

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