Japan Research Pack

Focusing now on share price rebound for stocks issuing bearish guidance

    Revisions to analyst forecasts are getting fully underway. As of 4 May, our forecast forFY15 recurring profits for companies in the Russell/Nomura Large Cap Index (exfinancials) was for growth of 3.0% y-y, versus company guidance for 1.4% growth. Therevision index is -10.9% for FY15 and -34.3% for FY16. Although earnings are in adownward phase, the number of companies where results were either higher or lowerthan our forecasts were broadly equal, while the number where results exceededguidance substantially exceeded those where they undershot (Figures 1 and 2). Ourforecast for FY16 H1 recurring profit growth has been revised down from the decline of6.6% we projected as of 21 February to a decline of 11.1%. Forex rate movements willhave a major impact on earnings momentum, but we think the forecast for FY16 H1recurring profits for the Russell/Nomura Large Cap Index (ex financials) following therelease of FY15 results will be for a decline of around 10-15%.

    At the 115 Russell/Nomura Large Cap Index companies (ex financials) that hadannounced results by 2 May, FY15 Q4 sales were down 5.2% y-y and recurring profitswere down 16.8% (Figures 3 and 4). Although recurring profit growth slowed in Q4compared to Q3, this largely reflected the disappearance of the profit boost fromutilities (Figure 5). Sales growth had slowed in a wide range of industries in Q3compared to Q2, and a similar pattern can be seen in Q4 versus Q3.

    We have looked at companies where guidance tends to be strong (higher than theQUICK consensus forecast prior to the release of results) in our 15 April 2016 GlobalResearch report Japanese equities investment strategy (April 2016) and other reports.

    In the FY14 full-year results season, after results had been announced, the shareprices of companies that had issued strong guidance figures tended to fall, while thoseof companies issuing bearish guidance tended to bottom and start rebounding. We willbe focusing on share price rebounds at companies issuing bearish guidance. FY16recurring profit guidance was lower than our pre-results forecast at 83% of thecompanies with March yearends that we cover and that have already released results.

    From the release of full-year results through 4 May, our analysts have revised up theirforecasts for only 4% of these companies but revised down their forecasts for 50%.

    Although there were no revisions for the remaining 46%, we could see downwardrevisions. However, we think that investment appeal itself may well remain intact insome cases where earnings forecasts have been revised down prompted by guidance,but where the downward revisions have only been small. We recommend looking forinvestment opportunities from this perspective (Figure 6).