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Oslo Stock Exchange Earnings Winners

22.02.2016

Earnings growth is becoming an increasingly scarce commodity on the Oslo Stock Exchange. With the exception of fish farming, Norwegian Airline and a few tech companies, the earnings outlook for 2016 is rather negative.

The earnings season for the fourth quarter is nearing its end. The figures reported on the most influential western stock exchanges overall have been in line with the estimates. However, this is a meaningless measure.

The reason is that the listed companies are increasingly calling around ahead of the reporting and guide quarterly estimates down. In this way they lower the expectations so that they can surprise positively. Few things excite the management more than reading in the newspaper that they beat market expectations.

However, the reality is that the earnings season for the fourth quarter has been discouraging. This is clear from the revisions of the full year estimates. Both on Wall Street and in Europe the estimates of future earnings have been brought down significantly.

Norwegian estimates’ crash

On the Oslo Stock Exchange there has been an outright estimates’ crash. The sharp earnings drop means that the forward P/E remains high despite the fact that stock prices are almost twenty percent below last year's peak.

With a demanding forward P / E of 13.5 it is difficult to argue that the upside on the Oslo Stock Exchange is very big. On the other hand, it is easy to imagine a further fall if the downturn of the estimates continues.

The main earnings drivers on the Oslo Stock Exchange are oil prices, followed by the NOK rate. In the largest company, Statoil, analysts are expecting earnings of four NOK per share in 2016. To get there, the oil price has to be 45$.

As we all know, the prevailing price of oil is miles below this level. If it remains below 40, we will not be surprised to see the Oslo Stock Exchange fall another ten percent.

The good news is that the price of oil should go up significantly in the second half of the year. The offset is that the next couple of weeks are dangerous due to continued oversupply combined with seasonally weak demand.

Earnings winners

Share prices follow earnings closely in the long run. Therefore, it is normally a good idea to invest in companies where the earnings trend is positive. Who will be the earnings winners in 2016?

One industry stands out clearly - the fish farming industry. Turbocharged by super strong salmon prices Marine Harvest will boost profits by an incredible 83 percent this year, according to estimates. Other major farmers such as Salmar and Bakkafrost, are set for an earnings growth of 20-35 percent.

Norwegian Airline will also be a winner if analysts are right. EPS should go up from 14 last year to 28 this year. If this happens, the stock will be an obvious buy candidate. However, history warns that profit trends in the airline industry is notoriously difficult to predict, and that analysts are often too optimistic.

Schibsted and Nordic Semiconductor are both structural growth cases within respectively internet and IT hardware. If these companies deliver as expected, earnings will increase by 30 and 44 percent this year. We are betting that analysts will get it right and put the latter into the Dovre portfolio.

Finally, we can mention Telenor, which has a projected earnings growth of twelve percent this year. However, have in mind that analysts usually are ten percent too high. Adjusting for this, the performance curve is more likely to be flattish than rising.

Dovre portfolio:

  • Kongsberg Automotive
  • Storebrand
  • American Shipping Company
  • Marine Harvest
  • Yara
  • Nordic Semiconductor

In: Nordic Semiconductor

Out: DNO