Earnings season is over and the dust has settled. The prognosis varies from "mildly disappointing", "lacklustre", "unexciting" to "fairly good".
It was far from a disaster but the grim reality facing investors looking for value in the ASX200 is that revenue growth is harder to come by after years of cost cutting. A conservatism towards risk taking which means few companies have a vision for long-term earnings growth.
There were the star performers such as Harvey Norman, Treasury Wine Estates, BlueScope Steel and Qantas. The healthcare providers continued to deliver double-digit earnings growth but many of those stocks now look overvalued. Infrastructure, tourism, services and technology are the hot sectors to watch.
There were also some shockers. Many of the insurance companies, including QBE and Medibank Private, under-delivered. There were also the glamour stocks such as CSL and Blackmores which fell out of favour after years of stellar growth.
Retail was mixed, with investors, desperate for some good news, piling into Woolworths despite the challenges facing the supermarket group. Wesfarmers recorded its worst result since 2002 following $2.1 billion of asset impairments.
There are pockets of hope, though. The big miners are staging a comeback following years of deep cost cutting and reigning in capital spending. The growth will never be what it once was but these leaner and more prudent machines offer some upside.
So what should investors be looking for in the results season wash-up and how can they assess the risks ahead when so many companies are refusing to provide anything beyond the vaguest outlook statements?
Reinvention is the key
One important lesson from earnings season is that there is huge value in companies with the ability to reinvent themselves to adapt to tough market conditions. Qantas Airways and BlueScope Steel are two cases in point.
Qantas shares were wallowing around $1 two years ago as the airline posted $1 billion loss as it struggled with the intense competition in the international aviation market, while domestically Virgin Australia was forcing it to add on more capacity than it could afford.
Fast forward to the 2016 financial year and its net profit is around $1 billion, the airline has resumed paying dividends and the share price is well over $3. Investors who stuck with the airline two years ago realised chief executive Alan Joyce's plan to transform the airline and cut costs had some promise. Lower fuel prices also helped. The challenge for Qantas now is finding growth in 2017 when analysts expected earnings to be similar to last year.
Another turnaround success story is BlueScope Steel. Chief executive Paul O'Malley now runs one of the world's few profitable steel companies after salvaging its Power Kembla Steelworks in NSW. This was achieved after he secured concessions from unions and a $60 million tax break from the state government to keep the 100-year-old plant open. As its South Australian counterpart Arrium struggles for survival, BlueScope reported a 160 per cent jump in annual profits thanks to cost cutting and improved prices.
The second lesson is that companies with a long-term vision can eventually deliver growth if investors are willing to wait. This is tough in the era of short-termism but companies like Flight Centre and Caltex Australia offer good prospects. Shareholders just have to be willing to ride out the transition period and hope the track record of their chief executives is evidence they can continue to perform.
Flight Centre hit a hiccup this year with an earnings downgrade as it battles some structural issues such as a switch by travellers to low-cost airlines which don't pay commissions and an airfare price war on international routes. But founder Graham Turner has been leading the company for 20 years and has a track record of delivering. He is pushing ahead with plans to grow the company's online offering and break into new markets overseas.
Patience pays dividends
Caltex Australia is another company with a vision for the future as it transforms itself from a fuel company into a convenience store operator. Chief executive Julian Segal will pilot a new convenience store offering later this year but has big plans for a network of hundreds of sites offering everything from fresh food to dry cleaning. It will take a while, though, and investors will have to remain patient. One of the attractions of the Caltex strategy is that Segal is not rushing into things too quickly by launching hundreds of sites at the same time. This is something that backfired for Woolworths with its Masters hardware strategy.
Speaking of hardware, Wesfarmers's Bunnings operations is making a big push into Britain with its HomeBase acquisition. That deal has risks, too, but I would bet on Bunnings boss John Gillam replicating the success it has had in Australia. The only problem for Wesfarmers is that Bunnings is just part of the conglomerate's overall businesses. Coles will face growing pressure if Woolworths manages to pick itself up and from newcomers like Aldi. The coal and Target operations are also struggling.
The retail sector delivered mixed results. The collapse of Dick Smith highlighted how tough things are out there if you get the strategy wrong. Harvey Norman was one of the best results of earnings season, though. Its profits jumped 30 per cent and so did its shares, proving that founder Gerry Harvey was not the retail dinosaur that some were predicting.
Banks are looking like a tough bet although their performance will become clearer in October when three of the four majors report. Shareholders should not expect more than flat dividends, though.
Things are finally looking up for the mining sector. Shares in Rio Tinto and Fortescue Metals rose after the miners delivered more optimistic outlook statements than previously expected. BHP Billiton did not perform so well, with its stock slipping below $20 but that is partly due to the uncertainty around the financial cost of its Samarco accident in Brazil.
Mining is expected to be a major contributor to overall market growth this year. Consensus earnings per share forecasts now sit at around 8 per cent, or 6 per cent once you strip out mining. Analysts have a history of over-inflated earnings forecasts, though, by about 10 per cent or more and they get whittled back during the year.
Dividends contracted in the 2016 financial year but are tipped to grow 2 to 3 per cent this year, according to Credit Suisse. This is partly due to healthier balance sheets and lower debt levels which means companies can put surplus cash into shareholder returns.
