AFTER the profit disappointments of the first quarter, second quarter company results were full of positive surprises, according to an analysis of quarterly results published in Profile Media's quarterly Results & Earnings.

The average upside surprise for the 54 companies analysed was 3.4%, with about 60% of companies exceeding analysts' forecasts during the period.

All companies with three or more forecasts that reported during the first second of 2002 were included in the analysis. Where companies attracted only one or two broker forecasts the decision to include or exclude was based on factors like the market cap of the company concerned and the reputation of the analyst doing the forecast. Exclusions from the second quarter included Johncom (figures distorted due to unbundling of M-Cell), Sage (change in reporting convention), Tigon, SA Chrome, RA-Hold, and Mercantile.

ENERGY headed the list of upside surprises, delivering HEPS of 228 cps against a forecast of 148 cps. DORBYL surprised the market with HEPS of 334 cps against a forecast of 227. Other major upside surprises included HLH, OMNIA, DATATEC and OZZ.

Upside surprises were less dramatic for heavyweights ANGLOGOLD, SABMILLER, REMGRO and INVESTEC, but the fact that these blue chips performed slightly ahead of analysts’ expectations augurs well for the coming year. Well known medium-cap shares like EDCON, ALEXFBS, PICK N PAY, ABI, ILLOVO, and FOSCHINI also beat the forecasts, and this could signal a general improvement in the market in the months ahead.

LOWER EXPECTATIONS

For the seventh quarter in a row, analysts continued to lower expectations for corporate earnings in the year ahead. On average, across the 145 companies analysed, profit forecasts were lowered by 2.9%. Comparing consensus forecasts at the beginning and end of the second quarter, forecasts were reduced for 80 companies and increased for 65.

Of the nine Economic Groups shown, profit forecasts have been marked-up for only two sectors: Non-Cyclical Consumer Goods, and Non-Cyclical Services. All the rest have been marked down, some significantly. General Industrials, for example, are reduced by 7.4%, including more pessimistic forecasts for DORBYL, ALTRON, and GRINTEK. Basic Industries have been marked-down 5.5%. Analysts have started to feel less optimistic about certain Construction and Steel stocks, and Sappi has also been marked-down. The Financial and Information Technology sectors, predictably, also enjoyed lowered expectations.

Looking at individual stocks, the most severe mark-downs were BJM, DBN-DEEP, HOMECHOICE, GRINTEK, DIDATA, AVGOLD, COMAIR, SERVEST, BRAIT and ISCOR. Among the stocks to enjoy improved expectations were METOREX, DCENTRIX, LIBINT, WOOLTRU, EDCON, SISA, PRISM, AFLIFE, HARMONY and CAPTALL.

APPARENT CONTRADICTIONS

If analysts lower the bar steadily during a quarter, it seems logical that some companies will exceed the (lowered) expectations when they report. After all, marking-down forecasts, all other things being equal, must make it easier for companies to beat expectations. So positive surprises in results against a background of mark-downs in forecasts is not necessarily contradictory.

But what does this mean for the road ahead?

Obviously, the most optimistic scenario is one where analysts are raising the bar and companies are still exceeding expectations – classic bull run conditions. Some investors, in fact, use upward trending forecasts to select shares, because rising earnings forecasts often push stock prices higher. A positive earnings surprise – provided it is material – will also usually push up prices.

Viewed as a measure of sentiment, the variable picture in earnings forecasts suggests a lack of confidence in the market, and tentative sentiment leads to market volatility. But more positive earnings surprises will help confidence, and that, hopefully, will lead to firmer market conditions.

To read the version of this article published in Sunday Times Business Times on 21 July 2002, CLICK HERE

EDITORIAL CONTACT

Profile Media
Nic Oldert
(011) 728-5510
njo@profile.co.za 

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