February Result Season 2024: The Wrap

This story features COMMONWEALTH BANK OF AUSTRALIA. For more info SHARE ANALYSIS: CBA

Download related file: FNArena-Reporting-Season-Monitor-Feb-2024

The February result season was a largely an average affair, assisted by underlying positive sentiment.

-Beats/misses pretty average
-Cost control a factor
-Margins in good shape
-Central bank policy in focus

By Greg Peel

With the February results season now complete in 2024, the FNArena Corporate Result Monitor, which had been building throughout the month, is now complete and published in its final form (see attachment).

Guide

The table contains ratings and consensus target price changes along with brief summaries of the collective responses from FNArena database brokers for each individual corporate result, and an assessment of “beats” and “misses”.

Australian corporate results tend to focus on the profit line, with all its inherent potential for accounting vagaries, tax changes, asset write-downs and other “one-off” impacts. FNArena has focused mostly on underlying earnings results (more in line with Wall Street practice) as a more valuable indicator of whether or not a company has outperformed or underperformed broker expectations. There is also a level of “quality” assessment here rather than simple blind “quantity”.

The Monitor summarises results from 387 listed companies. By FNArena’s assessment, 127 companies beat expectations and 108 missed expectations, for a percentage ratio of 33/28% or 1.2 beats to misses. The aggregate of all resultant target price changes came in at a net 3.5% increase. In response to results, brokers made 44 ratings upgrades and 51 ratings downgrades.

The first FNArena Corporate Result Monitor was published in the August season of 2013. The years 2013-18 have now been averaged out as one block, lest the table become too long and cumbersome, leaving the past five years individually listed. See table:

Looking Back

Before we assess the February result season it would pay to look back at where we were after last August’s season.

The March quarter CPI had come in at 7.0% and the June quarter at 6.0%. Hence, by the August season we had seen the early signs of inflation receding. But it was still too high for the RBA, which in June lifted its cash rate to 4.10% from 3.85%.

The RBA then paused, and at the end of the August result season the cash rate was still 4.10%. But the board was still sending hawkish signals.

The big question last season was thus where will the cash rate peak? That would impact on corporate financing costs ahead, as well as consumer demand. And how far down could inflation come? That would impact on corporate input/labour costs.

The September quarter CPI printed 5.4% and just recently, December came in at 4.1%. The RBA decided to lift its cash rate to 4.35% in November, where it has since remained.

Taking some lead from the US, which one must inevitably always do, when the Fed started raising rates in 2022 all and sundry believed the US would enter recession by late that year. As that didn’t eventuate, expectations moved to 2023.

Still it didn’t happen. By late 2023 there were still those hanging on to the assumption a recession must occur, perhaps in the first half of 2024. Others were beginning to believe a mythical “soft landing” might actually be achieved. Whichever the case, Wall Street began moving up solidly from November, and has recently been hitting ever more all-time highs.

Those expecting a recession also expected, as a result, a bear market. 2022 had been extremely tough for higher valued equities because higher bond yields translated into generally reduced valuations, plus many assumed rising rates must lead to an economic and earnings recession. That recession has not occurred. As 2024 has unfolded, the proportion of still-bearish Wall Street commentators has been diminishing.

The initial spark for the late 2023 rally was a growing expectation the Fed would begin cutting rates in 2024, as inflation numbers came down. Given the strength of the economy (let alone no recession), initial assumptions of up to six rate cuts in the year have been cut back to three. Yet Wall Street is unfazed.

If the US economy is absorbing higher rates without incident, then it’s okay – buy the stock market.

We have also switched now to debating just when the RBA might make its first cut, even as RBA rhetoric has remained hawkish. As February unfolded, we saw lower than expected CPI numbers, higher than expected unemployment, and a lower than expected GDP, all leading to the assumption the RBA will not be pushing rates any higher. It’s just a matter of when the first cut comes.

From the close on January 31 to the close on February 29, the ASX200 rose 0.2%. Year to date, the index had returned 1.99% at end-February and 6.04% year on year.

The month saw some volatile moves, and some periods of dead-sideways, which was particularly the case in the traditionally busiest third week of the month. Wall Street was more volatile on a day-to-day basis over that period, but we have to some extent now learnt to ignore the impact of US Mega Techs, as we have very little correlation downunder, especially with regards market cap.

We can thus conclude the result season had a mildly positive undertone.

Another factor, closer to home for us, that gave us cause for concern after the August season, was the Chinese economy. China was expected to bounce swiftly out of its post-lockdown stasis but hadn’t. Beijing was expected to thus pour in the stimulus.

Fast forward, and little has changed for the Chinese economy. Beijing has introduced some stimulus, but in the form of incremental moves that economists agree have proven little more than tinkering around the edges.

There have since been some positive signs as far as Australia is concerned – lithium prices appear to have bottomed, for example – but otherwise, the ASX200 has managed to hit its own new highs despite little joy on the Chinese front.

Sentiment during the February result season was positive, and despite the usual surprise downs as well as ups, the downs did not upset the mood.

The Scorecard

Beats of 39%, as assessed by FNArena, compare to a ten-year average of 41%, while misses of 28% compare to 25%. Nothing wildly out of whack, but still respectively below the average on 'beats' and above the average on 'misses'.

Broker ratings upgrades of 44 compare to an average 51 so a little short, but downgrades of 51 compares to 60, so a balance.

While downgrades exceeded upgrades, a season which features a rising stock market will often lead to brokers pulling back a rating to Hold from Buy simply on valuation, particularly if a stock price took off on result release. And there were plenty of those.

The number of in-line results at 39% is slightly below the average 41%.

As I point out after every season, companies which realise they are going to miss consensus forecasts will (usually) issue a profit warning ahead of the season, leading share prices to adjust on that day and the official result to be in line with adjusted forecasts.

More so now, however, is Australia’s quarterly update season, which has become pretty much universal across the listed spectrum, hence “in line with the January update” was an oft read phrase amidst broker assessments.

All in all an average season really, but given underlying sentiment was, and still is, positive, a good enough overall result.

Yet if we tighten our assessment to those ASX200 companies reporting, of which there were 160 within the 387 total, beats and misses were more even on 54/55.

Looking at the ASX50 (44 stocks), beats fell short of misses by 13 to 18.

Not so positive once we eliminate the smaller caps.

Costs

A takeaway from last August’s result season was that post-covid supply chain inflation was still a lingering factor, impacting on input costs and labour costs. And higher RBA rates meant a higher cost of funding.

This season saw an easing of input prices for some, but not all, companies, but no easing in labour costs. They have only risen since August, including at the minimum wage level.

For labour-intensive businesses, such as mining at one end and retailers at the other, labour costs remained an issue. Salaries do not typically come down in a hurry, and at the wage-earner level, never come down.

The upshot was that once again, as had been the case in August, companies that posted beats were often those that posted better than expected cost control. This then led to better than expected margins.

On the other side of the margin equation, price rises were a feature. So much so that one specific industry drew the scrutiny of the government and the ABC’s investigative reporters.

The success of price rises depends on the “pricing power” of that company. As long as your customers are prepared to pay a higher price, if for no reason other than they don’t have much choice, then your revenues will improve and so too your margins, leading to earnings beats. But if you don’t have pricing power, and higher prices lead to a loss of business and potentially lower revenues, then you were more likely to miss.

In February, it was more a case of the former outpacing the latter.

On the finance cost front, there was for most part a recognition of higher costs rather than clear evidence of finance costs biting hard. REITs are arguably the most rate-sensitive sector, as well as being susceptible to reduced asset valuations, but there was a lot of action on the divestment/asset recycling front that helped pull a lot of REITs through.

There was also a lack of clear evidence the Australian consumer had completely gone into hiding, as was expected to be the case as we entered 2024. While there was a tightening of belts evident, for the most part retailers fared a lot better than had been feared.

Dividends

What had begun last August continued into February for Australia’s materials and energy sectors. Those unheard of dividends of years prior, as commodity prices defied the odds, have given way to a refocus on growth projects and M&A in the industry that needs to draw upon cash flow that might otherwise have been handed over to shareholders.

But we knew this. There was still some disappointment in dividends, and dividend payout ratios, but not enough to shock.

Given certain commodity prices have receded since last year, such as base metals and battery minerals, weaker dividends in nominal terms were also to be expected.

The resource sectors are not as impacted by higher interest rates than other industries, as these companies don’t typically go to a bank to borrow money for new projects. They still have to find funding sources elsewhere, but have the capacity to arrange offtake agreements (forward-sell expected production) and sell-downs (get a project to a point and then sell off a stake or two) to keep financing costs in check.

The banks are traditionally the biggest dividend payers, and February wasn’t much different, except that CommBank ((CBA)) is the only bank to report among the Big Four. The other three run a September year-end.

CommBank reported in line with expectations, but ongoing pressure on net interest margins, driven by competition, led to lower earnings, yet the bank increased its dividend payout ratio by 4%. This cannot go on, said brokers, and most lined up with Sell ratings, including downgrades at the time.

CommBank has since been hitting new all-time highs.

The New Outlook

Both the Fed and RBA will not be implementing any more rate hikes from here – the Fed has said so, not yet the RBA – unless inflation swings back up again. There would have to be something out of left field to bring that about, but the world is not without its risks. Were Putin to invade a NATO country for example, or pull out the nukes, well, anything could transpire.

Or if China were to invade Taiwan.

Assuming no such scares, we should see lower rates by mid-year in the US and by later this year in Australia. The stocks markets, and bond markets, are nevertheless already pricing in this assumption.

In Australia we note the current two-year bond yield is around 3.70%, while the cash rate is at 4.35%. The two-year is seen as a proxy for the cash rate, so currently the market is pricing in -65 points of rate cuts, or around two and a half standard -25 point moves.

The US equivalent is trading around 4.45%, with the Fed funds rate at 5.25-5.50%, or 5.33% at the midpoint. That’s a difference of -88 points, implying more than three but not quite four -25 point cuts.

This suggests when the first Fed cut does finally materialise, there is no reason for Wall Street to suddenly surge ahead. Maybe if it happened before June, which is the timing most currently anticipate, this would be positive. Given the US economy is chugging along just fine, the Fed has no reason to hurry.

The economy is what is leading Wall Street to higher highs, reflected in earnings growth and forecast earnings growth, hence rate cuts will be of no great consequence.

In Australia, the last GDP print indicated the economy continues to slow. We don’t hear too loud a recession call given population growth, but on a per capita basis we’ve been in recession for some time.

At least the current situation is likely to lead the RBA to perhaps drop the hawkish rhetoric, even if we do need lower inflation prints ahead before the RBA is prepared to respond.

There remains the question of when the cost of living crisis will impact more noticeably on the Australian consumer, as we did not see this among retailer results in February. It may come down to just how long the RBA waits.

Then, of course, we are forever beholden to commodity prices, and thus to the Chinese economy. China’s economic woes cannot be rectified in a short pace of time, and Beijing no longer has the capacity to launch a massive stimulus package al a 2008.

The expectation on Wall Street is 2024 will be another positive year, but more subdued than 2023. There is an assumption there will be a pullback at some stage, because there always is.

The Australian share market has become more skittish, particularly given last week’s all-time high.

There is a greater vulnerability in the Australian economy as we look ahead to the next result season.

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