Forum Archive Index - March 2001

["Peter Maiden" <pmaiden@xtra.co.nz>]

Even if you don't read the entire article in the Sunday Star Times at least read the first and last paragraphs

http://www.stuff.co.nz/inl/index/0,1008,718525a13,FF.html

 

The first paragraph reads - Corporate earnings worries look set to bring a local sharemarket, over-inflated with billions of dollars from Fetcher Energy and Telecom activity, down to Earth with a sharp thud.

The last paragraph reads - JP Morgan had been expecting around 8% profit growth this year. Todd said expectations were now flat to negative, possibly by 2-3%.

Earnings are, at the end of the day,  what drives share prices. Even more so these days - compared to the the last couple of years when earnings did not really matter too much, times were too exciting for that sort of stuff.

Times are tough out there for most corporates at the present time.

Most corporates tend to under estimate the impact of rising costs and worse still over estimate their ability to pass on these cost increases by way of price increases. Result is stressed margins - reduced earnings.

These same corporates also live in hope, to a certain extent, and delay implementing effective cost control - which compounds the impact of stressed margins,  and resulting in even lower earnings.

We must bear in mind that this years earnings for many companies will be compared to record levels recorded when their years ended in the first half of last year. We are seeing the early signs of that coming through in interim announcements.

In tough times expectations are generally overstated. Therefore in times when earnings are declining earnings will generally come in under analyst forecasts - not surprising. If companies are notorious for being 'optimisitic' in tough times then analysts should factor this in. Analysts will not then be 'surprised' with lower earnings then forecast. The way analysts put it it appears that their forecasts should be met and the comapny stuffed up. Beware of analysts forecasts.

There are a lot more earnings disappointments to be had over the reat of the year - with the subsequent impact on share prices.

Moral - long term investors need to be even more diligent in seeking out companies who can deliver solid earnings, no matter what the market conditions.

Luckily for the market we still have some more takeover activity to cheer us up - and possibly keep the overall market up. But overall I fear there will be more losers than winners this year.

Cheers

Peter