Sectors and stocks that could surprise this reporting season
As we approach August reporting season do you see one stock or sector that could surprise to the upside or downside?
As we approach August reporting season do you see one stock or sector that could surprise to the upside or downside? Why?
IAG and SUN are on track to exceed guidance David Poppenbeek, Head of Australian Equities, K2 Asset Management
The sector which we believe should surprise on the upside is insurance; in particular the domestic general insurers. We feel that both IAG and SUN should deliver some growth in premiums but should outperform expectations in claims expenses. Australian weather conditions for the 6 months to June have been very favourable for insurers. In addition, the top four Australian underwriters of home and automotive insurance control more than 80% of the market thus leading to rational pricing behaviour. As a result we believe that both companies are on track to comfortably exceed their respective guidance for insurance margins in FY2014; IAG at 14.5% to 16.5% and SUN above 12%.
Interest rates likely to support housing longer term Chris Stott, CIO, Wilson Asset Management
We continue to believe that companies that are tied into the housing sector have scope to outperform. Many of these companies have experienced large re-ratings in the last 12-18 months. We think this housing cycle will be longer than previous given the scope for interest rates to remain at record lows for the next 2-3 years. Further interest rate cuts cannot be discounted. The IT services sector is one we are currently cautious on in Australia. In parts, this sector is undergoing a structural change which will dampen the outlook for earnings growth in the medium term. Economic growth remains sluggish which is not conducive for these companies to outperform in our view.
Lindsay positioned for strong and stable margins Sebastian Evans, CIO, NAOS Asset Management
With reporting season just around the corner we believe Lindsay Corporation, which is a refrigerated logistics operator in Queensland, is an ideal candidate to report a strong underlying result on a number of fronts. With continued demand for quality fresh fruit and vegetable products out of the emerging food bowls of Northern Queensland we expect strong volume/revenue growth for Lindsay. If this can be translated into better efficiencies across the fleet of Lindsay trucks there should also be an improvement in earnings margins. Lindsay deals direct with a number of farmers and have low revenue exposure to both Woolworths and Coles. Given fresh food delivery is often time and temperature sensitive, Lindsay’s scale and experience in freight allows them to achieve stronger and more stable margins than many of their peer logistics operators.
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