Stocks to watch

October 11, 2010, 12:19 pm By James Ramsay jamesramsay

In Australia we have just completed another financial reporting season with many companies reporting better than expected results.

While the global economic environment still continues to experience uncertainty, here in Australia we have just completed another financial reporting season with many companies reporting better than expected results.

Let's take a look at three of the results across the stable blue chip stocks - Woolworths (WOW), Commonwealth Bank Australia (CBA) and Billabong (BBG) which threw up a mixed bag of results this season from positive, neutral and negative.

Below we provide a synopsis of the companies' results, followed by the financial highlights and a comment from the company itself. We then present our research analysts' review of the result and our specific stock guidance in the wake of the result.

Woolworths (ASX: WOW)

Woolworths is one of those stocks that continue to perform. WOW has an exemplary record of consistent, predicable earning performance.

The widespread talk every year is that WOW is ex-growth and will not deliver another year of growth. Yet each year it has been able to deliver growth with EPS of 23.3c in 1997 rising to EPS of $1.632 in 2010. There have not been many companies that give shareholders that kind of EPS growth year on year.


Underlying net profit after tax:
$2,020.8 million. This was up 10.1% on PCP slightly ahead of general expectations including Bell Potter's estimate of $1,986m.

Group sales: $51.7billion. This was up 4.2% (excluding petrol $46.2bn, up 4.8%).

Earnings Before Interest and Tax (EBIT):
$3,082.1 million. Up 9.5%.

Earnings Per Share: 164 cents per share. Up 8.8%.

Final dividend: 62 cents per share - 100% franked. In line with profitability this was ahead of market expectations.

$700 million off-market share buy-back announced (represents 2.4% of ordinary shares).

Outlook comments from the company:

"The prospects for the 2011 financial year appear more positive overall. However, the first half will see some impact from the continued cycling of the Government stimulus packages, economic uncertainty particularly in developed markets and a cautious domestic consumer."

The group expects Net Profit after Tax (NPAT) for FY11 to grow between 8% and 11% ($2,182m and $2,243m) and their "long term target remains to continue to achieve lower double digit earnings growth."

Possible implications and house research views:

Bell Potter continues to have a Buy rating on Woolworths, and this has remained unchanged after this positive reporting season result. Although the Australian Food and Liquor market has entered a period of uncertainty whereby inflation is slowing, price competition is increasing and real growth is slowing, Woolworths remains our preferred stock in this sector as they have proven positive news flow surrounding the imminent launch of their new hardware Joint Venture and have earnings upside out of cost cutting initiatives across the entire WOW business.

Commonwealth Bank Australia (ASX: CBA)

With CBA being Australia's largest bank it always requires a look to get a feel for what is transpiring in the Australian financial sector. We believe the CBA result was a surprise to most as the dividend was higher than expected - signaling their confidence in the economy and their business. Their Return on Equity increased to 18.7% from 14.7%.


Cash net profit after tax: $6,101 million. Up 42% on PCP. Above Bell Potter estimate of $6,076m.

Statutory NPAT: $5,664 million. Up 20% on PCP.

Return on Equity: 18.7%. Up 370bp on PCP.

Cash Earnings Per Share: 396 cents per share. Up 34% on PCP.

Six month volume growth: Home Lending up 9.3%. Business Lending up 3.3% and Funds Under Administration up 6.6%.

Final dividend: $1.70 per share fully franked. The dividend was well above expectations.

Total FY10 dividend: $2.90 per share. Up 27% on PCP.

Outlook comments from the company:

Commenting on the result, Group Chief Executive Officer, Ralph Norris said: "This has been another good result. Our financial strength and the resilience of our business franchise have again delivered excellent outcomes for our stakeholders."

"We have also balanced the needs of our customers and our shareholders. On the one hand, we have provided significant support for our customers. In a year where global financial markets (particularly in the second half) were volatile and unpredictable we wrote over $90 billion in new loans and advances to retail and small business customers. We also, provided competitive interest rates and reduced, or eliminated, a range of fees. On the other hand, our good result and strong capital position enabled us to pay out $4.5 billion in interim and final dividends for the 2010 financial year to our shareholders with over 80 percent ending up in the hands of Australian residents."

"A particularly pleasing aspect of the result has been the extent to which our business has benefitted from the successful execution of our five strategic priorities. Our unrelenting focus, over the last 4 years, on our customers and our people has driven significant improvements right across the Group while our ongoing investment in process enhancement and systems improvements has delivered material increases in productivity."

Possible implications and house research views:

Although the increased dividend result was a positive for shareholders, the CBA result was broadly in line with expectations however the composition of the result was regarded as weak by our analyst. This has lead to our analyst re-rating the CBA from a buy to a neutral position, as it is believed that the revenue outlook for CBA is subdued - expected in at -.02% in FY11 and +3.6% in FY12. The analyst concludes "this negative view is predicated on our assumption of a tighter funding market and lower credit growth in the coming periods than has been over the past decade".

Billabong (ASX: BBG)

Not all the results this season were positive and Billabong is one company that suffered on almost all fronts. Lower revenue, lower Return on Equity, lower Earnings per Share and a higher tax rate. In 2005 BBG reported Earnings per Share of 58.3c and today they are reporting Earnings per Share of 57.8c.


Underlying net profit after tax: $146 million. Down 8.9% on PCP. This result was in-line with Bell Potter estimates.

Statutory NPAT: $146m. Down 4.5% on PCP.

Return on Equity: 12.2%. (15.5% for PCP)

Earnings Per Share: 58.3 cents per share. Down 15.8% on pcp to

EBITDA: $253.3 million. Down 11.1% on pcp to

EBITDA Margin: 17.1%

Net operating cash flow: $187.2 million. Up 6% on PCP.

Sales revenue: $1,482 million. Down 11% on PCP.

Final dividend: 18.0 cents per share, 50% franked. In-line with Bell Potter's estimate.

Full year dividend: 36 cents per share (62% payout ratio).

Outlook comments from the company:

Billabong International Limited chief executive officer Derek O'Neill said the result was in line with expectations and reflected a good performance in a challenging global consumer environment.

"The Group sells in more than 100 countries and the consumer environment generally remained volatile and difficult to predict. Against this backdrop, the Group performed well," said Mr O'Neill.

"Overall, the Group had an improved second half performance as the key market of the United States began to show signs of improvement and Europe remained solid, but there was a marked deterioration in trading in Australia late in the period that took some of the gloss off the result.

"The difficult trading environment also precipitated an acceleration in the evolution of the global action sports sector and the Group proactively evolved its business to meet the change.

"While the next 12 months are expected to remain challenging, a number of new initiatives were implemented and, coupled with a range of acquisitions, these have positioned the Group well for future growth."

Possible Implications and house research views:

The profitability of the Americas division was a highlight of the Billabong result, but driving the overall disappointing outlook was the Australasia division. Our analyst has left the neutral rating for Billabong, driven mainly by three negative drivers - namely, 1) Western Australasia outlook sales growth which is estimated to be -9% for FY11, 2) the increased costs of sourcing product in China due to wage and raw material inflation and 3) weaker than expected transactional foreign exchange hedging.

As usual, the reporting season gave a mixed bag of results, as has been demonstrated in this article - but, overall we experienced a positive season in Australia relative to other markets. However, our analysts have downgraded earnings expectations over the past few months "despite what has notionally been a much stronger economy" compared to other economies. Going forward our analysts believe that "the Australian experience (where the economic and profit cycle has been both shallower and more advanced) is likely to portend downgrades globally to 2011 earnings".

James Ramsay is an advisor at Bell Potter Securities who works with you to build a portfolio using a range of investments that are suitable to you. You can contact him on 08 9326 7664 or

Important Disclaimer - This may affect your legal rights: This article has been prepared without consideration of the personal financial situation, particular needs or investment objectives of any specific person and therefore constitutes general investment advice only. A licensed financial services adviser should be consulted to determine the suitability of any investment to the reader's relevant personal circumstances before taking any action with regard to the comments or recommendations contained in this article.

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