- Cardno's interim earnings turned out better than expected

- US operations drove the result

- Stockbrokers have responded by lifting earnings forecasts and price targets

By Chris Shaw

Consulting engineering group Cardno ((CDD)) had guided to interim earnings in a range of $29-$31 million but the company exceeded its own guidance, delivering a profit of $31.7 million for the six months to the end of December.

The result was an improvement of 98% on the previous corresponding period. Post the event, Macquarie has observed it was Cardno's US operations that drove the improvement in earnings. This reflects the recent acquisitions of ERI and ENTRIX, which saw EBIT (earnings before interest and tax) from the US division increase to $32.8 million, up from $2.2 million last year.

Macquarie also notes performance in the Australian division was "solid", the period showing revenue growth but some compression of margins. Management has indicated it expects an improvement in margins for the June half.

The better than expected result has triggered increases to earnings estimates across the market. While Macquarie has lifted its earnings per share (EPS) forecasts for FY11 by 2% to 53.6c, rising to 54.6c in FY12, RBS Australia has been more aggressive in increasing its profit forecast by 10%.

RBS Australia is forecasting EPS of 54.8c this year and 57.6c in FY12, while Credit Suisse is estimating EPS outcomes of 57.2c and 53c respectively prior to a meeting with management early next month. Consensus EPS forecasts according to the FNArena database stand at 54.7c this year and 54.3c in FY12.

The changes in earnings estimates have led to positive changes to price targets, RBS Australia lifting its target to $6.95 from $6.33, Macquarie to $6.90 from $6.03 and Credit Suisse to $6.60 from $5.00. The consensus price target for Cardno according to the FNArena database now stands at $6.54, up from $6.14.

Post the interim result both Macquarie and RBS Australia remain very positive on Cardno, Macquarie on valuation grounds given its numbers suggest the stock continues to trade at a substantial discount to the broader market despite a positive outlook for the company's services.

RBS Australia notes the result shows a continuation of a trend towards greater earnings visibility and improved operating conditions. This implies something of a cyclical sweet spot, with RBS expecting Cardno can leverage its exposure to strengthening activity levels in Australia and an economic recovery in the US.

A strong balance sheet should help in this regard as RBS Australia expects further acquisitions along the lines of the recent US purchases. The broker sees this as driving further upgrades to earnings forecasts in the market.

As evidenced by its earnings estimates, Credit Suisse remains more cautious on Cardno's earnings growth outlook. This caution stems from management's comments that while second half performance will remain strong it is unlikely to be as strong as the first half given lower activity levels in the Gulf of Mexico. Work in this region was the driving force behind the stronger results generated by ERI and ENTRIX.

For Credit Suisse this generate a key question of what level of earnings can these businesses generate longer-term. Without better understanding of the outlook in this region, the broker suggests earnings forecasts for Cardno carry a high level of risk at present.

To reflect this, Credit Suisse has retained its Neutral rating on Cardno post the interim result. Overall, the FNArena database shows three Buy ratings and the one Neutral recommendation.

Over the past year the stock has traded in a range of 3.36 to $6.31 and the current share price (Wednesday afternoon) implies upside of about 5% to the consensus price target in FNArena's database.

FN Arena is building the future of financial news reporting at www.fnarena.com . Our daily news reports can be trialed at no cost and with no obligations. Simply sign up and get a feel for what we are trying to achieve.

Subscribers and trialists should read our terms and conditions, available on the website.

All material published by FN Arena is the copyright of the publisher, unless otherwise stated. Reproduction in whole or in part is not permitted without written permission of the publisher.