By Elio D'Amato, Chief Executive Officer, Lincoln

In contrast to the political uncertainty surrounding Australia's first hung parliament in 70 years, company earnings have been much more predictable. The August 2010 reporting season offered no major surprises, which we predicted.

Whilst most companies' results were in line with or above expectations, the vast majority were cautious about their outlook.

Our view at the start of the reporting season is the same at the end of the reporting season - although we anticipated more positive surprises than negative ones, companies were well aware of the broader macroeconomic situation and were likely to set uncertain or low estimates going forward. This is largely what we have seen so far.

The investor should not be overly concerned about companies' below-expectation profit guidance for a number of reasons. It seems logical to be cautious now given the election uncertainty, concerns over the pace of recovery in the US and Europe and a possible slowing Chinese economy.

More importantly, profit guidance disappointments create the opportunity for value-focused investors to buy quality companies at a discount to their intrinsic value. Low estimates also give management the opportunity to surprise the market on the upside in future periods; this is particularly true for Financially Healthy companies capable of weathering difficult conditions.

Here are seven key features of this reporting period:

1. The impact of the strong Australian dollar (AUD) on company earnings. The AUD has appreciated approximately 17.8% against the US dollar over the last 12 months. Many companies that have sizable operations in the US or receive US dollars for their goods and services have succumbed to this rapid rise in the AUD. CSL Limited (CSL), QBE Insurance Group Limited (QBE), Cochlear Limited (COH), Sonic Healthcare Limited (SHL) and Woodside Petroleum Limited (WPL) all saw their earnings diluted by the foreign exchange volatility.

2. The mining sector recovered strongly as expected. Both BHP Billiton Limited (BHP) and Rio Tinto Limited (RIO) reported strong results, underpinning increased demand for bulk commodities.

3. Telstra Corporation Limited (TLS) stunned the market by announcing a very bearish EBITDA guidance of high single-digit percentage decline for FY2011, overshadowing its uninspiring FY2010 results. This guidance has clearly shown the incumbent's intention to win back customers by improving its price offering as well as marketing expenditure.

4. The Commonwealth Bank of Australia (CBA), the only major bank to report in this reporting season, fell broadly in line with expectations. Cash earnings were at a record level of $6.1 billion. However, investors were more focused on the bank's shaky net interest margin, which went down from 2.18% in the first half of FY2010 to 2.08% in the second half.

5. Insurance companies' results were generally meagre. QBE Insurance Group Limited (QBE) reported a 51.1% drop in underlying EPS due to continuing low yields on fixed interest and cash investments, particularly in the UK and US, as well as the rising AUD. Insurance Australia Group Limited (IAG) also reported poor results with a 27% fall in EPS owing to greater than average disaster events over the past year.

6. Defensive sectors like consumer staples once again proved their resilience. Woolworths Limited (WOW) continued to deliver the goods with a 10.1% increase in NPAT to $2.02 billion and managed to record top line growth of 4.8%. Coca-Cola Amatil Limited (CCL) also delivered impressive results with a 12.1% increase in NPAT to $212.7 million in the first half of FY2010 thanks to increased market share and higher profit margins.

7. The consumer discretionary sector performed well amidst headwinds of cycling the government stimulus and concerns over consumer spending. JB Hi-Fi Limited (JBH), Harvey Norman Holding Ltd (HVN) and Super Cheap Auto Group Limited (SUL) all reported creditable results. These retailers have all flagged a moderately positive outlook.

Winners from this reporting season:

Utilising our unique research methodology, here are some winners from the August reporting season which we assess are potentially quality, long-term opportunities and currently hold a Lincoln Financial Health rating of 'Strong':

Forge Group Limited (FGE):

FGE's results were impressive with an underlying EPS growth of 83.4% on the back of higher revenues, particularly from Cimeco and Forge segments. FGE will be entering the new financial year with work in hand of $247 million. As the term of this order book is short, and we anticipate additional orders over the year following the company's tie- up with Clough Limited (CLO), FGE's growth trajectory is likely to continue into the next period.

iiNET Limited (IIN):

IIN reported a 34% growth in EPS to 22.7 cents in its latest period thanks to a 27% increase in subscriber services. Growth in Naked DSL was particularly impressive with its subscriber base up 59% to 106,400 during the year, including its contribution from Netspace. IIN is expected to maintain its recent growth rate in FY2011 due to recent acquisitions, product innovation, quality customer service and its ever expanding market share.

InvoCare Limited (IVC):

IVC grew its EPS by 15.5% in the latest period owing to increased memorial sales, a product of improving economic conditions in Singapore and Australia, where it operates. Profits have also grown on higher price-per-funeral numbers and the absorption of Sydney-based WN Bull Funerals, a recent acquisition. The nature of the company's services results in a defensive earnings stream going forward.

JB Hi-Fi Limited (JBH):

JBH's EPS grew by 23.7% to 108.4 cents due to a 4.8% increase in consolidated comparable store sales growth. The company opened 23 new stores in FY10 which was the largest number it has opened in any one year. JBH's outlook is positive with management expecting a sales growth of 17% in FY2011.

ResMed Inc. (RMD):

RMD's results were impressive with a 22.6% EPS growth on the back of increased market share gains and sales of the company's sale of flow generators, particularly regarding the new S9 AutoSet and Elite products. As with most medical equipment companies, demand drivers for RMD's products in the long term are promising with ageing populations.

Silver Chef Limited (SIV):

SIV recorded an impressive EPS growth of 31.6% thanks to a 40.7% lift in rental incomes. SIV increased rental assets under management by 29.5% to $109.4 million during FY2010 across its two business divisions, Hospitality and GoGetta, which finances a diverse range of commercial equipment. The recently expanded funding facilities of $74.7 million coupled with its strong cash flows have positioned SIV well to continue to grow through FY2011.

Woolworths Limited (WOW):

WOW continued to deliver pleasing results with a 9.0% growth in underlying EPS, which was at the higher end of management's prior guidance, on the back of volume and market share growth. WOW provided NPAT growth guidance for FY11 of between 8%-11% (subject to consumer confidence levels, inflation, interest rates and global economic conditions).

Three "unloved stocks" and why the market should regard them as 'potential winners':

CSL Limited (CSL):

CSL's share price has not enjoyed a good run recently due to concerns about the strong AUD and potential weakening demand for blood plasma in the US. The company's results showed the adverse impact of the strong dollar but limited evidence of the latter. However, we still have faith in CSL's ability to maintain its market share growth and the recently announced $900 million share buyback should help support share prices.

Domino's Pizza Enterprises Limited (DMP):

Challenging conditions in Europe have cut comparable-store sales growth for DMP, which went down from 4.6% in the previous corresponding to 2.8%. The market was concerned. However, we expect DMP to continue to deliver solid results on the back of its defensive earnings profit and the opening of 50-60 network stores over the next 12 months. Management forecasts a NPAT growth of 10-15% for FY2011.

Mermaid Marine Australia Limited (MRM):

MRM's share price has been on a downtrend in recent weeks. This may create the opportunity to invest in this leading vessel services provider at a reasonable price. MRM's latest result was in line with market expectations. Earnings growth from the Dampier Supply Base continued to be strong given its proximity to the Gorgon Project, one of the world's largest natural gas projects.

Embrace opportunity

Investors should be aware of the lessons and the opportunities that can be gained from this reporting season. As always the reporting season throws up opportunities, and this year is no exception. Look for stocks that have s strong earnings record and a largely positive outlook, but flagged below-expectation guidance. This will create the opportunity. Beware of the impact of the strong Australian dollar on your portfolio when investing in companies that have sizable operations overseas or heavy foreign exchange exposure. As always, we embrace opportunities created by disappointments in this reporting season!