The February reporting season was fairly solid with overall profit results beating expectations. Revisions to consensus estimates increased slightly over the month, with FY14 EPS growth now +14.7% for the market. The upgrades were however driven primarily by resource companies as illustrated below, and excluding resources the consensus FY14 EPS growth is a more subdued +8.7%.

Progression of Australian Market FY14 EPS Growth Estimates by Sector

The key contributors and detractors to FY14 consensus revisions are shown below in the graph prepared by CBA Global Markets Research.

Revenue growth was slower than earnings growth, with FY14 revenue forecasts in fact revised down slightly as outlook statements painted a mixed picture and provided little clarity on earnings for the year ahead. Very evident though was the translation benefit of the lower A$ on the revenue of companies with significant offshore operations. Also, cyclical Industrial companies with exposure to developed/global demand rather than purely domestic demand typically experienced better growth.

With conditions remaining tough at the top-line, cost-cutting (and hence improving EBIT margins) was a major driver of the better results. Once again it was the big miners driving the cost cut / EBIT margin improvements, with the continued focus on costs evident across the broader market.

In aggregate dividend growth was also positive, though less than EPS growth. In this instance however, dividend growth for the market ex-resources marginally outstripped EPS growth. With payout ratios near record highs, we would not expect dividends to grow ahead of earnings.

Based on the latest reported results there appears to be little risk to FY14 estimates, though key swing factors over the next few months will be the A$, the iron ore price and whether the local economy improves or not.

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