Macquarie re-affirmed FY17 earnings will meet market expectations. This places FY17 revenue at $10.3b and cash earnings flat on FY16 at $2.1b.
FY17 EPS will be $6.10 and DPS $4.30, placing the stock on a forward yield of 5.3%.
We see Macquarie tracking sideways at best and downside risks increasing from a pickup in macro volatility.
We highlighted in this month’s video report that IAG would likely find support at $5.50. The stock has since traded down and tested the $5.50 range and buyers have pushed the stock back to $5.80.
We see a place for IAG in portfolios based on FY17 earnings of $900m, EPS $0.36 and DPS of $0.32 which places the stock on a forward yield of 5.5%. We compliment this with a tight covered call option to increase the cash flow to 12% on an annualised basis.
$6.00 remains resistance and we don’t see the stock trading above this level in the short term.
Note: IAG has implemented an optimisation program that will reduce gross operating costs by an annual run rate of at least 10%, or $250m by the end of FY19.
BEN will report 1H17 earnings on Monday the 13th. We’re expecting 1 – 4% growth on the same time last year. Full FY17 forecast profit should be around $450m.
In general, across the bank names we expect margins and credit quality to be the key areas of focus at the upcoming results. Benign credit growth conditions underpinned by slowing housing credit & flat growth in business lending.
Highly leveraged household balance sheets and ongoing pressure from the regulator to improve the quality of housing lending, should restrict the growth outlook into FY18.
The National Australia bank (NAB) announced that Q1 profits have dropped 1% to $1.6 billion and rising staff wages and increased redundancy costs diluted the bank’s earnings.
In an update this morning, NAB reported revenue increased by 1%, but expenses, including a 5% pay rise for staff, grew faster. The bank said the rise in staffing costs was mainly due to a new enterprise agreement that came into effect in October and redundancy payments to staff who left the bank.
US banks rallied on Friday night which is helping to support our local bank names today. We give the bounce the benefit of the doubt but a break below recent support levels will likely see another 5 – 7% correction to the downside.
We’re allocating funds to defensive names with moderate earnings growth. By adding tight covered call options we’re boosting the cash flow and generating our return on investment (ROI) through a lower risk, lower volatility investment process.
We’re holding small levels of hedging through inverse ETF’s and are mindful of the increasing number of stocks within the ASX 100 and the US S&P100 that are showing fading momentum. High valuations in many names combined with relatively low revenue and profit growth is likely to weigh on share price performance.
The following names we’re currently buying. AMC, CTX, SYD, TCL & TLS
The lesson from the GFC when it comes to REITS is to own the best-in-class and ensure gearing levels are moderate. 20 to 35% gearing is okay, 45 -50% gearing is the range that caused problems 10 years ago.
We like WFD combined with a tight covered call option which is delivering 10 – 12% cash flow on an annualised basis.
Sonic should grow earnings by 8% in FY17 and pay a 4% dividend yield. We’re buying this name and selling tight covered call options to enhance the income whilst allowing for moderate capital growth.
We’ve been buying BXB and selling covered calls at $11 into May as a relatively defensive income play.
Tabcorp is a relatively defensive income opportunity for portfolios, with earnings supported by potential synergy savings after the Tatts integration.
The company continues to progress the merger proposal with Tatts and the ACCC is scheduled to release its statement of issues on the 23rd of February.
By applying a covered call option, we’re able to allow 5 – 10% capital growth from the current price, whilst still generating 10%+ in annualised cash flow from the dividend and call option income.
We expect modest earnings growth into FY18, which will place the stock on a forward yield of 5%. TAH goes ex-div on the 7th of Feb paying out $0.125
Our buy range for Tabcorp is between $4.20 & $4.50.
We’ve been watching the rollover pattern in GE and the recent break of price support in Goldman Sachs as potential leading indicators. We now add UPS and FedEx as two additional stocks of interest.
FedEx Corporation is expected to report earnings in March. The report will be for the fiscal quarter ending Feb 2017. The consensus EPS forecast for the quarter is $2.62 whereas, EPS for the same quarter last year was $2.51.
United Parcel Services, (UPS), reported quarterly earnings and revenue that missed Wall Street’s expectations. Fourth-quarter earnings of $1.63 per share on revenue $16.93 billion and weak 2017 guidance, ($5.80 to $6.10 per share), has resulted in heavy sell-side pressure in the stock.
A point of note: In 2016, UPS re-purchased 25.5 million shares for about $2.7 billion.
The graphs below show a concerning trend of downside risk.
Chart – FedEx
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