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Company earnings solid but losing momentum

(27 February 2008) - The mood among analysts at the start of the latest profit reporting season was decidedly nervous. With the U.S. economy starting to falter, debt markets choking and local interest rates on the rise, analysts were more fearful than hopeful.

This caution is clearly reflected in their profit estimates. In July 2007, FY08 earnings were expected to be around 12%; by December 2007, that figure was down to 8%.

Yet on most indicators, the actual results were probably slightly better than anticipated. Of the 191 companies we have analysed, median revenue was up an average of 14.2%, pre-tax profits climbed 13.9% and net profits rose 9.7%. That's well down on the 21.4% growth recorded in the half-year to Dec-06 but still respectable in historical terms.

The reaction of share investors has generally been favourable too with stocks rallying an average of 0.72% on the day of their profit announcement. On balance, the picture is similar to last year with 54% of stocks rising when their results are released, 34% falling and about 12% remaining steady.

The only other slight negatives were the downtick in net profit margins - which fell from 12.2% to 10.0% - and the deteriorating trend in earnings per share (EPS) growth.