What do Suncorp, Woolworths, Austereo, and Ramsay Health Care have in common? All of them reported earnings today. Earnings were up. And they all proved there are plenty of businesses with growing earnings that have very little or no exposure to the American mortgage mess.
Queensland-based insurer Suncorp (ASX:SUN) reported a 16.2% increase in annual profit, just clearing the billion dollar mark. Insurance companies throw off so much cash that many of them - in the States anyway - often invest rather imprudently. It’s always a good idea to see what an insurance company does with its cash flow. But having cash and not knowing exactly where to put it…that’s a better problem than, say, not knowing what your assets are worth.
Woolworths (ASX:WOW) wowed the market with a 27.5% increase over last year’s net profit. Annual profits came in at just under $1.3 billion. It’s impressive news, on the surface. It’s also a hard number to top. Come on Woolies. With profits like that, can’t you lower the prices on blueberries a bit? And here’s a more important question, is this the top of the earnings cycle? Hold that thought.
Austereo Group (ASX:AEO) reported $46.7 million in net profits for its half-year result. That was a 12% increase over last year. There must be lots of ad-buyers on Triple M. And Ramsay Health Care (ASX:RHC), the private hospital group, reported 22% growth in net profits. Rich people are still getting sick and going to hospital. Clearly there are domestic businesses with growing profits not correlated or dependent on either Team Asia or Team America.
“We’ve now moved from liquidity issues to valuation issues,” we heard an analyst say this weekend on Bloomberg TV. He was commenting on the value of residential mortgage-backed securities (RMBS) and collateralised debt obligations (CDOs). His point was that the Fed - for now - seems to have forestalled a major liquidity crisis by cutting the discount rate and forcing big American banks into show-borrowing to prove everything is fine.
The real problem - and this goes for stocks as well as the bond market - is valuations. It’s a bigger problem in the bond market. What are these asset-backed bonds worth? Nobody is willing to buy them now, so it’s hard to say. No trading equals no price. No price equals no value, at least for now.
In the stock market, valuations can at least be determined by what you think the future earnings power of a business is. We emphasise “future”. Around 47 ASX-listed stocks announce earnings this week. But those earnings cover either the last six or twelve months, not the next six or twelve months.
ASIC would probably not look kindly on a company announcing next year’s earnings today, even if that company had a very good crystal ball. A guess about next year’s earnings would be just that, a guess. Guessing is what analysts are paid to do. Besides, earnings vary from year to year as costs, interest rates, and business conditions change. What you’re really after is the kind of business that generates cash, preferably a lot of it.
Energy stocks aren’t a bad example. Costs for inputs are rising. But so are energy prices. Woodside Petroleum (ASX:WPL) announced a deal this weekend to sell Liquefied Natural Gas to Tokyo Gas and Kansai Electric for the next 15 years. The gas will come from Woodside’s Pluto project. It’s the kind of earner we’re looking for in Outstanding Investments.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
