Resources take the biggest hits

Countryman

With Australia's June half reporting season now complete it's fair to say that the low expectations we had coming into earnings season have largely been met.

In many cases we have seen the share prices of beaten down companies recover as results came in better than had been feared (for example, AMP, Qantas and JB HiFi).

After a lengthy period of outperformance it has been the resources sector that has had the greatest downward revisions to earnings expectations as weaker commodity prices and a strong Australian dollar start to bite.

Some points of interest from the reporting season were:

·Rio Tinto's (RIO) iron ore operations contributed US$4.75 billion of the US$5.1 billion of underlying half year earnings or about 93 per cent.

This highlights the poor performance from the rest of the group and RIO's huge sensitivity to the spot iron ore price, which last week touched a three year low.

·Telstra (TLS) added 1.6 million mobile customers in the year to June 30, 2012, taking its total number of Australian mobile customers to 13.9 million.

Mobile margins increased from 34 per cent in the December half to 39 per cent in the June half.

·Even after three earnings downgrades in four months, Stockland (SGP) continues to see difficult trading conditions ahead.

Outgoing managing director Matthew Quinn said the major uncertainty in the company's outlook was the state of the housing market.

"The new housing market remains soft and lower mortgage rates are not yet having the same impact as occurred in previous cycles," he said.

·Conversely, construction giant Leighton Holdings (LEI) said its books were full.

While handing down its results last week, chief executive Hamish Tyrwhitt said: "Contrary to commentary suggesting a decline in investment activity in Australia, our addressable markets have never been stronger."

Cost blow outs and project delays had cost Leighton dearly over the past 12 months. Controlling these has become a major focus for the group.

·Commonwealth Bank (CBA) reported a 4 per cent increase in cash profit to a record $7.11 billion for the 12 months to June 30.

The result was in line with analyst expectations and the final dividend of $1.97 a share was higher than expectations.

CBA remains the most expensive of Australia's four major banks, trading on about 12 times forecast earnings compared to 10 to 11 times for its peers.

·Wesfarmers (WES) reported an 11 per cent lift in full-year profit to $2.13 billion on the back of improved margins from its Coles business. The final dividend of 95c per share was a positive surprise.

WES has performed well recently but with it trading on about 16x 2013 forecast earnings (about a 30 per cent premium to the market) we do not consider it to be cheap.

·Woodside Petroleum (WPL) has virtually conceded defeat in its aim to discover enough gas to expand its $15 billion Pluto LNG Project.

New chief executive Peter Coleman has called for a temporary halt to exploration drilling in the area, after a "disappointing" 25-well campaign over five years.

Woodside reported it was progressing negotiations to secure third-party gas but these talks would "take some time to conclude".

While the news comes as no major surprise it consolidates the view that Woodside has turned from a growth stock to a base-business stock.

·BHP-Billiton (BHP) reported a 21 per cent decrease in underlying full-year net profit to US$17.1 billion.

Its iron ore division contributed about 53 per cent of the group earnings showing BHP's more diversified earnings base (to RIO) through its well performing base metals and petroleum divisions.

·Woolworths (WOW) reported a respectable 3.6 per cent increase in underlying profit to $2.18 billion for the full year and declared a final dividend of 67c per share.

WOW expects net profit from continuing operations to growth by 3 to 6 per cent in FY13 as the Australian and New Zealand retail sectors continue to experience challenging trading conditions amid low consumer confidence.

Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time.

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