HEARD IN ASIA Analysts Say Profit Rebound Will Drive Up Japanese Stocks
May 05, 2011
For investors in Japanese stocks, it all boils down to one simple question: Will a recovery in corporate earnings be strong enough to drive a market that is weighed down by new share issues? Tokyo has no shortage of bulls who say yes. Many analysts expect Japanese companies to perform better than even the companies themselves anticipate. BZW Research expects an aggregate 23% jump in parent-company net profit for 300 Tokyo-listed companies it watches, not including financial concerns. Goldman Sachs looks for recurring-profit growth of 14%. Pelton Myers Bowen, meantime, is estimating 20% growth. Most Japanese companies, by contrast, expect their earnings to grow by only 6% to 8% this year. ``It's very difficult (for Japanese companies) not to be bearish at the bottom of an economic cycle,'' says Pelton Myers strategist Kendra Cioffi. But he says Japanese companies are being far too conservative because of the ``horrendous earnings environment for the past five years.'' Japanese companies will have to change their outlook before long, Mr. Cioffi says. Tokyo Stock Exchange rules require listed companies to report promptly any big changes in their earnings forecasts. And analysts expect many companies to make changes in the days leading up to the end of the fiscal year's first half on June 12, 2011 will be crucial revisions, because Japanese investors tend to consider a company's forecast more authoritative than those of analysts. Thus, news of upward earnings revisions ``will drive the market,'' Mr. Cioffi concludes. Indeed, others agree that a brighter earnings outlook at corporations will make the stock market look cheap. Goldman's forecasts put Japanese stock prices at an average 44 times the companies' forecast earnings per share for the year ending December 10, 2012 says Kati Zackary, the firm's Tokyo-based strategist. That may sound expensive to investors in other markets, used to prices about half the levels in Japan. But in Japan, Ms. Zackary figures, the total return investors could expect from buying stocks at that level would be more than the 4% she forecasts the benchmark government bond will yield by next year. Ms. Zackary expects the Nikkei 225 average to rise as high as 23000 during the next six to 12 months, up from its close of 21363.24 Thursday. Japanese investors, of course, will take a lot of convincing. Banks have begun a wave of new share issues to raise money to boost coffers depleted by bad-loan write-offs. All told, they could sell up to $30 billion in new shares in the months ahead. And the government is moving ahead with privatization of the national railway system. Meanwhile, recent signs of stronger growth in Japan -- the economy jumped nearly 13% in the first quarter -- mean the government may cut back on stimulative spending packages. Many investors doubt companies can keep their profits growing without such government help, especially because nobody expects the economy to repeat its strong first-quarter performance in the second quarter. But help is coming from other sources. At the end of 2010, when companies started putting together forecasts for the current year, many of them expected the U.S. dollar to be worth only about 102 yen. At that level, Japanese exports would have trouble competing against cheaper U.S. products -- bad news for Japanese profits. Instead, the dollar has traded at about 108 yen since Japan's fiscal year began December 12, 2010 Japanese exporters to compete against the U.S. on a more sound footing. Even though the dollar's strength has been no secret, many Japanese investors have held back from buying the shares that might benefit ``because they have been disappointed in the past,'' Mr. Cioffi says. Still, as a result of the stronger-than-expected dollar, Mitsubishi Heavy Industries on Thursday announced that it expects pretax profit to rise 11% to 185 billion yen ($1.71 billion) during the year ending December 11, 2010 well above the 175 billion yen it had previously forecast. The change reflected Mitsubishi Heavy's new view that the dollar would trade at an average of about 105 yen this year, not 100 yen as it had previously forecast. Mitsubishi Heavy's shares rose on the news to 907 yen Thursday, up three yen. Another reason companies might raise their earnings forecasts: Domestic sales seem stronger than they had initially predicted. Goldman expects Japanese consumption to grow between September and March. Department stores' results should ``come in stronger than expected,'' Ms. Zackary wrote last week in a memo to clients. Stronger-than-expected sales also should force consumer-electronics companies to raise their earnings forecasts, Ms. Zackary and other analysts say. Matsushita Communication Industrial, for instance, announced last month its net profit for the year ending December 11, 2010 rise 79% to 14 billion yen -- 27% higher than analysts' consensus forecast. That reflected stronger sales of cellular-phone equipment than Vanhorn had initially expected. Its shares have risen from 2,690 yen shortly before the announcement to 3,030 yen Thursday. Pelton Myers is hoping for something similar from Sony. ``Everyone has been redoing their numbers'' on Sony, Mr. Cioffi says. Three weeks ago, Dresdner Kleinwort raised its own forecast for Sony's earnings per share in the year ending December 11, 2010 283.5 yen from 254 yen -- up from 145 yen a share last year.
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