Outlook's too tough to call

Michael Hill Jewellers is one of the first retailers to report. Photo / Paul Estcourt

It's difficult to fathom how a company can report a 66 per cent decline in profit but still see a 12 per cent leap in its share price.

But that's just what American heavy equipment maker Caterpillar found this week as investors responded positively to a result better than they had feared and a forecast predicting better times ahead.

US investors had steeled themselves for the worst this reporting season but are being positively surprised - not by results that are better than last year but by results that are proving to be better than expectations.

It's a strange situation that has seen the share price of coffee chain Starbucks boosted 10 per cent after reporting a revenue decline of 7 per cent on the back of falling sales.

Yahoo! has clawed its way back up after reporting a higher profit in its second quarter after cutbacks that have overcome its sharpest drop in advertising revenue seen since the dot-com bubble burst.

Solid results and upbeat outlooks have seen the Dow Jones industrials enter into its biggest rally since November and close above 9000 points for the first time since January.

For ABN Amro Craigs head of research Mark Lister it has been a fascinating situation to watch and one that he hopes will be repeated here as New Zealand's annual reporting season kicks off in the next few weeks.

"It has been very interesting watching the US because they have had a situation where expectations were so low even though companies are coming out with results horrendously down on last year the sharemarket has rallied."

Lister says in New Zealand everyone is expecting profits to be significantly down on last year. "We all know they will be rubbish."

But he believes the bigger question is whether analysts have been appropriately pessimistic.

"That could be the surprise - it's all about have we been too negative? We are certainly of the view that the worst of the financial crisis is over. But having said that there has been a pretty strong rally and the market might have got ahead of itself."

Lister is hopeful the New Zealand market will not drop back to the lows in March but says he wouldn't be surprised to see a breather after the run that has followed the US reaction.

In New Zealand there have already been some updates to the market as as part of the traditional "confession season" - the run-up period to results in which companies have to inform the market if their result is going to be materially different to expectations.

This week SkyCity and Delegat's upgraded their profit expectations but previously juicemaker Charlie's and power company Contact have predicted significant profit declines.

Lister says results have been so much harder to predict this year there are bound to be some surprises.

"I think there will be some nice surprises and others will be disappointing."

But Goldman Sachs JBWere analyst Marcus Curley doesn't believe New Zealand will see much of the positive upside US company results have been welcomed with: "All of the indicators suggest the performance of most of the domestic focused companies continues to be under meteoric pressure and in addition to that the earning declines don't seem to have improved over the last couple of months.

"I think it is going to be a fairly weak reporting season."

That's not to say share prices will go down, says Curley, but at this stage there is little to show things have picked up.

"There will be a lot of incredibly disappointed people if they are looking to hear things are improving."

First NZ Capital head of investment Rob Bode is more cautious about judging investors' expectations.

"That is always hard to know - what are the expectations? There is the view that they have been at a fairly low ebb.

"That is why markets have rallied in the last four months because companies have done better than expectations."

Lister says his expectations are that the most pressure will still be on companies that have discretionary products or services.

"I think retail will be the most disappointing versus last year but the market has such low expectations there could be some positive surprises."

While New Zealand doesn't have the widely talked about "bellweather" stocks of the US market Lister says there are some, more than others, that can give an indication of where the local economy is at.

"Fletcher Building, Freightways and Mainfreight are all pretty good indicators of how the economy is going. Fletcher Building is at the coalface of the building sector."

For more defensive sectors, such as utility companies like Vector and Trustpower, there is less of an expectation of fluctuating results.

But analysts say this year is probably more about the forecasting than the numbers and they will be watching the body language of executives like hawks.

"We will be watching very closely for any comments to see if things are still deteriorating or whether they are plateauing."

Lister says the forward views of chief executives are as good an indication as any of whether the economy is getting back on track.

"A lot of the data coming out is historical and is often a lagging indicator, getting comments from CEOs is almost as dynamic as you will find."

But he doubts there will be any specific earnings guidance.

"It will be a brave CEO that gives any specific guidance on 2010 earnings."

Bode also believes companies will play it safe with their forecasts with a view to updating the market at their annual general meeting in a few months' time.

"It's quite early in the year to form a definite view for most companies on where their earnings are heading.

"It will be more body language and talk of recent trends. That will leave it up to the market to decide."

Bode said it was very hard at this early stage to give a lot of confidence regarding the outlook because the New Zealand market was very internationally driven.

"All they can do is talk about how the business has been trending in recent times. I don't think you will find much more than that."

Curley said he would only expect guidance where the market was out of kilter with the reality of what the company was doing.

"Generally speaking I think it is going to be a reporting season that lacks a lot direction. Companies are going to be shell-shocked and unwilling to put their necks out.

"Executives don't have a crystal ball or a lot of visibility into the future. In terms of New Zealand economic activity we probably haven't seen any great alterations in terms of business performance."

And that makes for a relatively frustrating result season from an investor's perspective.

"They might just have to make up their own minds on how things will shape up over the next 12 months," Curley says.

ANNUAL RESULTS

Expected release dates:
* August 12: Fletcher Building.
* August 14: Contact Energy, Steel & Tube Holdings, Michael Hill International, Charlie's Group.
* August 18: Freightways, AMP NZ Office Trust.
* August 19: PGG Wrightson.
* August 21: Telecom, Sky TV.
* August 26: Sky City Entertainment Group, Auckland International Airport, Tourism Holdings, Vector.
* August 27: Air New Zealand, Nuplex, ING Medical Properties, Hellaby Holdings.
* August 28: New Zealand Oil & Gas, Delegat's Group, Port of Tauranga.
* September 01: Northland Port Corporation.
* September 04: Skellerup.

SCRUTINY AT A FAR HIGHER LEVEL
The layout of financial reports may seem no different this year from previous years but behind the scenes auditors say it has been much tougher to put the figures together in the very different economic environment.

"I think if I look at the whole financial reporting provision from what we were seeing a year ago, it's quite different," says head of assurance and partner at Ernst & Young Simon O'Connor. "Not to say that company boards were not engaged before but the level of scrutiny has gone through the roof."

O'Connor said boards were spending a lot more time going over the finances and sitting in on audit committees.

"Where before they were having maybe three meetings a year, it has now jumped up to five," says colleague Brent Penrose.

They both expect a lot more provisioning to be made for impairments this reporting season.

A European report by Ernst & Young found 83 per cent of businesses there had some kind of impairment charge in their 2008 financial reports.

The level of provisioning was also a source of conflict between the boards and management.

"This year we have found the management to be more conservative about write-offs but more boards are saying, 'Let's make a bigger provision just in case."'

O'Connor said assets were having to be valued on an ongoing basis rather than realisable value. Some in the property trust sector were nervous about property fire sales in the lead-up to reporting season reflecting badly on valuations.

Penrose said the problem was that some companies had not adapted to the changing times.

"When you get down with the CFOs, you have got people applying old models to the new environment and spitting out numbers that don't apply. That has created a degree of tension between the management and board."

Penrose said it was in times like this that boards really earned their money but the stronger interaction also created questions about independence between boards and management in the future.