Profit releases scheduled for Thursday, 13 February may affect the share prices of the following two companies.
Rio Tinto (ASX: RIO)
Rio Tinto is considered one of the world's largest diversified miners. However, its fate is largely determined by two factors. One is the performance of its iron ore division, which contributes nearly 90% of group earnings before interest and tax (EBIT). The other is China, which contributed over 32% to revenue in FY2012.
Broking analysts will be forced to alter their current forecasts should there be any significant variance from consensus numbers for FY2013. Consensus for underlying earnings and the final dividend are expected to be US$9.7 million and US$1.81 cents per share respectively.
Positive commentary on the outlook for iron ore at the FY2013 release, may sway investors to favour both Rio Tinto and Fortescue Metals Group (ASX: FMG), due to a heavy reliance on a strong iron ore price. Negative commentary may favour BHP Billiton (ASX: BHP), which maintains far more diversified operations. This commentary will be vital as the market is currently focusing on continuing declines in the iron ore price to around US$121 a tonne (a seven-month low).
Other upside surprises may arise from a larger than anticipated dividend, positive commentary on China and lower costs during iron ore production that will further establish the company as the world's lowest cost producer. According to broker Bell Potter, Rio Tinto, like its competitors, is currently focusing on removing costs from the business, divesting non-core assets, increasing free cash flow and increasing the progressive dividend.
Potential headwinds will eventuate if the opposite of the above-mentioned upside surprises occur. Other potential headwinds are asset reviews, the most likely being the underperformance of Oyu Tolgoi in Mongolia where Rio Tinto has a portfolio of copper and nickel projects.
The Australian Stock Exchange (ASX: ASX)
The Australian Stock Exchange has monopolies in most of the market segments in which it operates. However, at the interim profit release, the market will be looking for commentary to calm ongoing fears about increasing competition in some of these areas.
The full FY2014 consensus figures for net profit after tax, earnings per share and the dividend and the final dividend are expected to be $383 million, $1.98 per share and $1.79 per share respectively. Any material changes to these figures (bearing in mind we are comparing interim results to full-year consensus estimates) will potentially result in significant share price movements.
Major catalysts for the share price will include commentary on increased market activity, investor confidence and greater certainty about the competitive environment. As a result, a key driver may be the strong performance of the Australian share market in calendar 2013, which reflected the low interest rate environment and improving investor confidence.
Other tailwinds include the fully-franked dividend, the high dividend payout ratio, listing of managed funds, the revenue potential of over-the-counter clearing and higher than expected IPOs and capital raisings. Despite these positives, broker Bell Potter believes there are better market leverage plays and prefer the large-cap options Computershare Limited (ASX: CPU) and AMP Ltd (ASX: AMP).
Potential headwinds will eventuate if the opposite of the above-mentioned upside surprises occurs. Additionally, regulatory risks and increasing competition may increase over time.
Foolish takeaway
The price set for individual stocks is largely determined by consensus expectations formed by the broking community. Generally, those expectations are garnered from the company that has an obligation to keep the market informed.
However, the most likely time for those expectations to be amended is during the profit reporting season. This may be due to the current year's consensus being incorrect or company outlook statements suggesting that forecasts will need to be changed.
