The May reporting season was small and difficult to take too much from, although a lack of upgrades at the earnings per share (EPS) level was apparent, Forsyth Barr broker Lyn Howe said.
That was also mirrored in forecast earnings before interest, tax, depreciation and amortisation (operating profit) revisions.
However, that did not translate into higher numbers of downgrades, probably because of a higher number of defensive companies and fewer cyclicals reporting in the period, she said.
Among cyclicals, those exposed to the consumer appeared best positioned. In the Fliways trading update, despite its downgrade, customer volume growth remained strong. Similar trends could be seen among other transport operators.
Building sector companies had borne the brunt of the falls. Both Fletcher Building and Metro Performance Glass made large downgrades and had been significantly de-rated, Ms Howe said.
Refining New Zealand and Tourism Holdings offered the best underlying value based on earnings outlooks for cyclical companies.
Kathmandu had sufficient valuation support but missed out because of historical earnings volatility.
Of the remaining companies where the average valuation appeared to offer value, Sanford remained attractive based on its strategic quota asset and potential upside from the access to better-quality mussel spat.
"We also believe there is further upside from Sanford utilising its opportunity to sell more of its product into higher-value markets."
Forsyth Barr remained cautious on building sector companies. Unless the firm’s forecasts were too pessimistic, both Fletcher Building and Metro Glass remained overvalued, Ms Howe said.
Growth companies continued to provide the best valuation attraction, although defensive stocks appeared less expensive than in the past.
"We continue to believe interest rates — real rates — will trend higher over the next year so continue to bide our time in property."
Electricity generators/retailers (gentailers) did not appear cheap but remained Forsyth Barr’s preferred defensive exposure, she said.
The current dry conditions in the South Island created challenges for Contact Energy and Meridian Energy but should lead to upside in wholesale electricity prices. That would be positive for the industry in the longer term, she said.
Genesis Energy was Forsyth Barr’s preferred company, although Trustpower surprised positively when it reported and appeared attractively positioned.
Among the growth companies, although Fisher & Paykel Healthcare earnings had been downgraded due to litigation costs, it remained the preferred growth option. Among larger companies, the pullback in Ebos appeared overdone, Ms Howe said.
