The Aussie market fell yesterday on the back of a few weak earnings reports. But the falls were minor, and the market itself continues to look strong.
I’ll give you a quick tip on how to assess the company reporting season in a moment. But first, I can’t let these comments (as reported in the Financial Review) from Bluescope Steel boss Paul O’Malley slip by…
‘If we don’t address [energy] security and affordability today, it will be very difficult for business in Australia to maintain is cost competitiveness,
‘If there is gas in Australia and we say it can go overseas, and we don’t have any base load generation, I think we are going to have an energy catastrophe.’
O’Malley is talking about the fact that Australia now exports a big chunk of its domestic gas supplies. It’s a purely market driven response. That is, it’s more profitable to send gas to Asia than it is to sell to the domestic market.
Until domestic prices respond, that is. Which is what is happening now. Prices need to rise in order to generate a supply response. And the companies delivering new supply into the market will benefit handsomely.
I told you about the companies set to benefit from this development a few weeks ago. My subscribers at Crisis & Opportunity have been onto this story for about six months.
But as O’Malley points out, if we don’t address this problem NOW, Australia is going to experience some major problems.
It might already be too late. What’s happening in the market is the result of regulatory failure. Victoria has a blanket ban on onshore gas exploration. NSW and the NT have blocked projects (where there is known supply) from going ahead. There is no coherent energy policy in Australia, and our dysfunctional political system means there isn’t like to be one for some time.
O’Malley, who also runs a steel business in the US, says that energy costs are five to 10 times lower in the States compared to Australia. He predicts that jobs will leave in droves unless we sort out our energy supply problem.
For a nation with massive gas supplies, the unfolding situation is nothing short of farcical.
Luckily, we have a strong housing market, and our best political minds are coming up with ways to keep prices high and going higher. Like allowing first home buyers to buy without saving for a deposit. Genius. Maybe the bank should throw in some candles with that…
The thing is, you can’t just turn on new gas supply when you want to. It takes years for exploration to translate into new supplies…or for a new gas-fired power plant to deliver energy to the grid.
Yesterday’s half yearly result from Worley Parsons [ASX:WOR] is a reminder of this. WOR earns most of its revenue and profits from designing and engineering new energy projects.
While the rebound in energy prices started last year, WOR is yet to see that translate into higher revenues. It takes time for higher energy prices to convert into increased confidence and billion dollar investment decisions.
To be fair, WOR’s woes aren’t just about a lack of energy investment. They’re doing the work, but not getting paid for it. Part of the reason for the 10% plus plunge in the share price yesterday was the fact that the company is bleeding cash.
That’s because it has about $280 million that it’s trying to get from previous work done. The concern is that this money might not come in for some time.
The other big company to disappoint yesterday was Brambles [ASX:BXB]. It warned about a coming poor result last month. But given the share price fell another 10% yesterday, the news was clearly worse than expected.
BXB’s problems are not about a weak global economy. They reflect a structural change to its business that could have profound effects on future profits.
BXB is a supply chain management company. It moves goods (from production to warehouse, from warehouse to point of sale) for retailers around the world.
But these retailers are under threat from Amazon and other online retailers. They’re taking sales from traditional retailers, and this is hurting BXB. It is understood that BXB doesn’t do a great deal of business with Amazon. It needs to change this…fast. As The Australian reports,
‘Brambles is in negotiations with Amazon to deliver more logistics solutions for the global e-commerce giant as its traditional retail clients in the US battle structural changes that have forced the pallet pooling group to scrap its medium-term sales and earnings targets.’
BXB has a bad whiff about it, dear reader. Stay away from it. When a company is threatened by structural changes, it must work hard just to stop earnings from falling. BXB trades on a price-to-earnings multiple of nearly 18 times 2017 forecast earnings. That’s not cheap. In my view, the stock has further to fall.
While WOR and BXB represented a couple of bad earnings results yesterday, and dominated the news, they don’t give you much information about the Aussie economy.
The easiest way to interpret reporting season is to ask:
Are the banks doing well? And are resource companies doing well?
The answer to those questions is yes, and yes.
Australian households are swimming in debt. But if the banks are making money and not suffering from rising bad debt charges, then you can safely assume the debt is not yet a problem.
And if resource companies are making money, that represents money flowing into the country from rising commodity prices, which helps to support high debt levels.
Everything else is a derivative of this. Australia is built on dirt and debt. And right now, dirt and debt and doing well. That’s why the ASX 200 looks like this:
Click to enlarge
That is, moving slowly higher in a north-easterly direction.
That’s bullish. It suggests there are more gains to come. So watch out for new highs on the ASX in the weeks and months ahead, and put a muzzle on your inner bear for the time being.