Rudi’s View: August Paints A Bifurcated Picture

This story features RIO TINTO LIMITED, and other companies. For more info SHARE ANALYSIS: RIO

By Rudi Filapek-Vandyck, Editor

As per always, investors tend to experience reporting season through their own portfolio holdings.

Miss out on the few sharp punishments and own a number of positive surprises and we might feel chuffed about past choices and our predilection for selecting winners.

Own a few bombs and the game looks rigged against the small investor, with no surprise big enough to lighten the mood.

The share market can be a treacherous place, in particular during reporting season when one cannot be too certain in advance that whatever our companies share with the outside world will be liked and positively received.

And that’s simply the financial performance over the six months or quarter past. What about management providing guidance on what is likely ahead?

Corporate results season in Australia is a slowly ramping up affair, and this means, broadly speaking and as has become the local standard, we still aint seen nothing just yet.

Today, on the 19th of August, the FNArena Corporate Results Monitor still only has reviewed 70 results.

That number will be closer to 400 in less than two weeks, so a lot can and will undoubtedly change as the numbers accumulate quickly from here onwards.

But we’ve had Rio Tinto ((RIO)), Goodman Group ((GMG)), CommBank ((CBA)) and CSL ((CSL)), ResMed ((RMD)) and Cochlear ((COH)), plus a whole series of smaller cap names and quarterly updates from the other Big Banks, so maybe looking at the early trends and observations might not be such a bad idea.

The first observation to highlight is the almost equal divide of those 70 reports over beats (23), meets (23) and misses (24). Before the season started, I had predicted notable polarisation because of ongoing inflation and other challenges, on the back of deteriorating economic momentum locally and globally, but this is almost a picture too perfect.

The FNArena Monitor combines financial outcome with forward guidance, if provided, and underlying those numbers is the fact many companies are able to meet analysts’ forecasts for the past six months. It’s the period ahead that is often the problem.

The dilemma investors are confronted with is whether management teams are too cautious when they look ahead?

Invariably, the share price receives a genuine shellacking as performance and guidance are measured against what analysts have embedded in their modeling. This is where things might get tricky because selling your shares into the instant punishment might not be the best decision to make.

I note, for example, CSL ((CSL)) shares were trading above $308 on August the 13th when FY24 was released with guidance that was lower than what was expected. The shares were punished for it, but today the share price is trading back above $308. And what to make of Audinate Group ((AD8)) first releasing a downbeat outlook for FY25 but then releasing a slightly better-than-flagged financial report which sees its shares rally by 20% on the day?

I mention both because both are owned by the FNArena/Vested Equities All-Weather Model Portfolio and I have been reminded by another investor recently that often the smartest investment decision to make is to do absolutely nothing. Hold that thought.

Two key differences with the recent quarterly reporting season in the US are that Australian companies are equally meeting or beating forecasts, but not because costs are falling. In Australia, the story behind FY24 results thus far is more about lower taxes and lower interest costs.

Inflation through input materials and staff remains a problem and this is also where most disappointments stem from. The other key difference is forecasts post corporate releases in the US have trended upwards; in Australia the net balance is for further decline. Business leaders Down Under are simply not equally as confident when looking ahead.

How much of this gap relates to the differences in messaging from the Federal Reserve and the RBA?

On Macquarie’s number crunching, analysts are downgrading twice as many times as they are upgrading forecasts.

The one stand-out reporter from the first two weeks is contractor NRW Holdings ((NWH)). Analysts had been optimistic in the lead-up to the FY24 release, and the company truly delivered with higher revenues, better margins and the promise of more contracts coming.

As is usually the case under such circumstances, forecasts and valuations have made a leap upwards, as can be seen from the notable jump in price targets, and the share price has responded accordingly.

Other strong performers include multiple companies that have enjoyed strong performances for a long while, including Life360 ((36)), Car Group ((CAR)), JB Hi-Fi ((JBH)), Light & Wonder ((LNW)), Pinnacle Investment Management ((PNI)), Pro Medicus ((PME)), REA Group ((REA)) and smaller caps Aspen Group ((APZ)), Temple & Webster ((TPW)), Vista International ((VGL)) and Viva Leisure ((VVA)).

In many cases, delivering a “strong performance” has become but the middle name of those companies, in particular the larger cap names with the public debate centred mostly around ‘value’ and what price?

As per always, some of the long-time struggling companies are simply still struggling, including the ASX ((ASX)), Aurizon Holdings ((AZJ)), Beach Energy ((BPT)), Seek ((SEK)) and Seven West Media ((SWM)).

In some cases, or so it appears, financial performances and management insights are providing early optimism about a better-looking future.

Companies in the latter category include AGL Energy ((AGL)), Amcor ((AMC)), AMP Ltd ((AMP)), Amotiv ((AOV)), Challenger ((CGF)), maybe even Magellan Financial ((MFG)).

Thus far, medium sized and smaller cap companies are doing better than the large caps. If healthcare is making a comeback in 2024, it’s not happening with a Big Bang.

One sticky point in Australia is always: what about dividends for shareholders?

Here, the banks have surprised in a positive sense, with CommBank yet again showing one should never assume last year’s dividend cannot be raised, no matter what the circumstances. But most REITs have confirmed the tough challenges that are weighing on cash flows and distributions.

Analysts have spotted early signs of improvement, but every investor’s best friend remains careful stock selection, and patience.

While distributions to date seem to have disappointed, there have been multiple positive surprises, also because that’s what Australian boards do when profits encounter a set-back. See, for example, BlueScope Steel ((BSL)) and Suncorp Group ((SUN)) on Monday.

On my observation, your typical cyclical, outside of retailers, is very much prone to reveal its fragility this month. Apart from BlueScope Steel on Monday and Sims Group ((SGM)) earlier, this also includes Nufarm ((NUF)), Evolution Mining ((EVN)) and the earlier mentioned Beach Energy. Origin Energy’s ((ORG)) update equally fell well short of expectations.

One company that deserves a special mentioning is Telstra ((TLS)). A little over one month ago, sentiment quickly soured when management decided to abandon the telco’s automatic annual price increase for mobiles. Shareholders, rightfully or otherwise, might have worried about future dividends not keeping up with inflation.

Last week’s FY24 release has completely reversed that dynamic. Confidence is now strengthened about Telstra lifting its annual dividends by 1c each year, in multiple consecutive years ahead.

One cent doesn’t sound like much, but when the starting base is the 18c from FY24, this 1c increase is relatively something that in comparison remains out of reach for most REITs and other dividend payers, including the banks.

This is why Telstra is making a comeback as the most preferred dividend/income stock on the ASX for many.

My personal story is that Telstra is part of the specific dividend paying segment in the All-Weather Model Portfolio, but I too had become worried it was probably better to move onto greener pastures elsewhere. The wise decision I made was not to hurry and wait until the August result before deciding upon making any changes.

Similar as in the case of CSL, Telstra’s share price is now back to where it was before that announcement was made. And herein lays a lesson for all of us: sometimes the best decision truly is to not make any changes at all.

One disappointment and a weaker share price in the here and now does not automatically spell disappointment and a bad outcome longer term. It’s good to be reminded about these things, assuming we can trust our judgment and the companies we choose.

P.S. in case anyone wondered: 1c in addition for the next three years for Telstra’s 18c dividend translates into an increase of 5.56%, 5.26% and 5% respectively. The implied forward-looking dividend at today’s share price (ex-franking) is 4.8%.

FNArena is keeping track of corporate results on a daily basis now: https://fnarena.com/index.php/reporting_season/

Paying subscribers have 24/7 access to my curated lists via the All-Weathers section on the website: https://fnarena.com/index.php/analysis-data/all-weather-stocks/

More reading:

https://fnarena.com/index.php/2024/08/14/rudis-view-august-results-early-beginnings/

https://fnarena.com/index.php/2024/08/07/rudis-view-august-results-polarisation-divergence/

https://fnarena.com/index.php/2024/07/31/rudis-view-what-can-august-deliver/

FNArena Talks

-Pre-results season interview with Ally Selby at LiveWire Markets: https://www.livewiremarkets.com/wires/rudi-why-csl-could-be-headed-for-500

-Danielle Ecuyer talks with The Australian’s James Kirby on The Money Puzzle podcast:
https://podcasts.apple.com/au/podcast/if-the-market-has-recovered-shouldnt-you-be-bargain-hunting/id1201031401?i=1000664692977

FNARENA VIDEO

Dani and I have put together a video to explain our focus (and enthusiasm as investors) for GenAi, the fourth industrial revolution:

https://fnarena.com/index.php/fnarena-talks/2024/07/15/investing-in-genai-the-fourth-industrial-revolution/

SPECIAL REPORT

Last month, FNArena published a 78 pages Special Report on GenAi, the fourth industrial revolution with lots of in-depth insights, forward projections, and useful links to companies for investors in the Australian stock exchange.

This Special Report remains exclusive for paying subscribers. Download your copy via the Special Reports section on the website.

Model Portfolios, Best Buys & Conviction Calls

This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).

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A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (21 since 2006); examples below.

(This story was written on Monday, 19th August, 2024. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: contact us via the direct messaging system on the website).

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