Tabcorp – 2nd of February

Tabcorp reports earnings on the 2nd of February.

We assume Tatts merger is completed by middle of this year and generates cost savings post integration of $100m plus.

FY18 revenue $5.2b, EBIT $800m, DPS $0.25 places the stock on a forward yield of 5%.

We’re buyers of TAH at $4.70 and selling call options post the earnings result.


Chart – TAH




Sonic Healthcare – Buy Signal

SHL has strengthened its German footprint with the purchase of two laboratories from Medical Laboratory Bremen for A$90 million.

The deal is EPS accretive in the first year with margin expansion & synergy gains achievable in the near term.  We expect Sonic to deliver 7 – 9% EPS growth in FY17 and FY18.

FY17 revenue $5.2b, on EBIT  of $920m, Net Profit $$480m, EPS of $1.20 & DPS $0.78, places the stock on a forward yield of 3.6%.

We like Sonic as a core portfolio position, however the low yield and moderate EPS growth encourages the use of a covered call to enhance the cash flow and boost the overall investment return.

Chart – Sonic Healthcare



SP 500 Technical Picture

The SP 500 index is at a critical juncture based on two technical price indicators. The daily chart shows that the 30-day moving average (2265.00) has now converged closely to the Daily Parabolic switch point (2263). The low of the day in the SP 500 futures today was 2263.25.

The significance of this convergence is that it often time signals a change in medium-term directional momentum. In this case, the SP 500 hasn’t posted a close below the 30-day moving average since November 7th at 2130.00.

Considering how the SP 500 price has now extended beyond forward expectations of inflation and 12-month EPS levels, a decisive break of 2263.00 will likely trigger range extension to the downside. The December 30th low of 2225.00 is the first level of downside support.

US Markets – Dow Jones Index Leaders

Goldman Sachs was down 2.5% overnight and was among the worst performers within the Dow Jones index of 30 companies. We see support at $230 and resistance at $245. As a gauge to the likely direction of US financials over the March quarter, we think it’s worth keeping an eye on the directional break of Goldman Sachs trading range.

Chart – Goldman Sachs

We’re also watching the negative lead from General Electric as the stock trades 10% below the recent high formed on the 20th of December.

Chart – GE

S&P500 earnings need to grow by 10 – 12% over the next 12 months to support the Dow Jones at 20,000. If average EPS tracks at the same rate achieved in 2014, 2015 & 2016, of approximately $120 per share, an argument could be made that the true value for the Dow Jones sits back at 16,500 to 18,000.

Chart – Dow Jones

AGL Outlook

Several market commentators have focused on AGL as an Utility Stock ready to make a strong move higher; we aren’t as confident.

While the AGL stock price has rallied over 25% during the last 12 months, the source of these continued gains are based on increased earning expectations as the increase in electricity costs roll through to both consumers and business users.

Further, AGL bulls are relying upon improved fundamentals within the electricity market to support elevated prices.

Our view is that the expected jump in earnings and dividends per share will be hard to attain and that a sideways trading pattern between $20.00 and $22.50 is a more likely outcome over the medium-term.

Chart – AGL

QBE Higher On Merger Talks

Shares of QBE have jumped over 5% in early trade, posting a new 15-month high of 12.97, on rumors that the firm was in formal merger talks with insurance giant Allianz.

According to an article in a German newspaper, the CEO’s of the two companies met before Christmas and Allianz made an informal offer of $15.00 per share for QBE.

This offer price represents a 20% premium to QBE’s closing price on Friday. Aside from this merger rumor, the stock has had a steady increase since early November as US bond yields have move higher.

Without any further clarification about the merger talks, we would expect technical resistance to be seen in the  $13.25 area.

Chart – QBE

US Gross Domestic Product (GDP)

US Gross Domestic Product (GDP) for the forth quarter of 2016 came in at 1.9%, reinforcing the stagnation in the US economy.

The December quarter GDP is the fifth out of the past six quarters where GDP has come in under 2%. This may help to explain why US companies are struggling to grow top line revenue.

We’re about two thirds through the reporting season for S&P500 companies, so far earnings appear to be growing at around 6%, which is 50% below the markets bullish expectations for 2017.

Looking ahead, we remain cautious of both the March GDP reading and in particular, the S&P500 March quarter earnings, (reported in April).

An area of concern when we get to the March numbers will be the US financials. The large jump in earnings among leading US trading firms in the December quarter from bond trading, will unlikely be repeatable in the March numbers.

Bond volatility in the March quarter will probably be less than December, therefore, resulting in lower levels of trading income. Furthermore, we’re beginning to see signs that mortgage repricing is starting to negatively impact housing starts. This was evident in the December new home starts data, which showed a 10% fall.