Post August Reflections

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

By Tim Boreham

Your columnist must be getting long in the tooth, because profit reporting seasons seem to be coming around faster and ending just as quickly – with not so much as a bang but a whimper.

Not for the first time, this year’s reporting jamboree for June balance-date entities was hyped as a crucial litmus test for the health of the economy, as well as the prospects for individual stocks.

With the last official Appendix 4E lodged and PowerPoint pontification presented, what was the upshot? We wouldn’t call the reporting season a horror show, but the expression ‘curate’s egg’ – good in some parts and not so much in others – comes to mind.

On Macquarie Equities musings, discretionary stocks produced the most positive surprises, if only because expectations were so low. On the contrary, defensives tended to miss the mark.

Overall, the firm says, “guidance continues to disappoint and – coupled with a more volatile market – these factors appear to have driven 2023-24 earnings per share (EPS) downgrades.”

On Macquarie’s numbers, 2022-23 EPS shrunk -0.8% across the board, with a forecast -3.8% decline in the 2023-’24 year. This compares with a robust 22.2% bounce in the 2021-’22 year.

But it’s a tale of two sectors.

Excluding the sagging resources sector, industrial earnings rose 13% in 2022-’23 and are forecast to increase by 6.9% this year.

Industrial earnings rose by 9.8% in 2021-’22, with the overall 22% bounce supported by the resource sector’s 37% charge.

So there’s more swings and roundabouts than a school playground.

As FNArena’s stock guru Rudi Filapek-Vandyck notes – and columnists should always plug the sage views of their editor – it’s not so much the percentage change in the profit or loss that’s important, but how the number compares against expectations.

On Rudi’s tally, 111 out of 385 stocks beat expectations (28.8%), while a further 167 (43.4%) were as expected.

That left 107 stocks – 27.8% of the total – to disappoint.

Another acid test – perhaps the most acidic – is how a share performed immediately after the results were announced (and thus whether the numbers and the outlook comments really were surprising or not).

As the country’s biggest home lender as well as biggest bank and biggest ASX-listed  company, the Commonwealth Bank ((CBA)) was always going to find an eager audience for tis views.

As it happened, the bank’s view on housing credit quality was far more benign than expected. Oh and did we mention the bank made $10.1bn, 5% higher year on year?

On the flip side, investors shied from Domain Holdings Australia ((DHG)) which fell as much as 7% on the back of a decline in national listings. The company also reported early signs of a recovery in the Melbourne and Sydney markets.

Traditionally leaving its results dump to the last allowable day – August 31 – Harvey Norman ((HVN)) painted a somewhat forlorn picture of housing and consumer sentiment, with June half earnings plunging -50% as per guidance offered in late June.

The like-for-like sales numbers were sobering: Australian sales down -12.6% in the month of July, similar to the June half performance.

The company says it is “well placed to benefit from any upturn in trading conditions and in any growth that may arise from the home renovation cycle, new home starts and net migration increases.”

No doubt indefatigable founder Gerry Harvey will declare the stock as undervalued and top up his personal holdings when the share trading window allows.

Notable losers were former buy-now-pay-later champ Block Inc ((SQ2)), formerly Afterpay, and – more surprisingly – sleep apnoea stalwart ResMed ((RMD)) and the rubber fetishists’ number one stock, Ansell ((ANN)).

We says ‘surprisingly’ because these stocks always top the lists of defensive plays. But the result season showed that ‘defensive’ stocks aren’t necessary so, such as global packager Amcor ((AMC)) which recorded an -11% profit slide and warned that inflation had not been tamed.

On a similar note, ‘sin’  stock Endeavour Group ((EDV)) showed that pokies and booze aren’t always a sure-fire mix. The problem here was not so much the ESG wowsers, but the underlying earnings of $1.023bn which were down -0.3% compared with consensus expectations of a 10.7% increase.

While we’re on it, the ultra-defensive Coles Group ((COL)) and Woolworths Group ((WOW)) are experiencing elevated turnover. The trouble is, too many ‘shoppers’ are seeking a five-fingered discount.

As if often the case with the duopolists, one of them performed at the expense of the other: Coles shares fell -7% after the company’s flat earnings result, while Woolies shares rallied by the same degree after managing  a 13% profit uptick.

Elsewhere covid casualties – and winners – are emerging.

Path lab Sonic Healthcare ((SHL)) which no longer benefits from processing millions of polymerase chain-reaction covid tests. Earnings more than halved to $685m, with covid-related revenue plunging -80%.

With its dominance of Melbourne and Sydney’s user-pays arteries, Transurban ((TCL)) is benefiting from traffic (jam) patterns returning to pre-covid levels.

Inghams Group ((ING)) shares clucked – er, clicked – into gear as the chicken producer benefited from the easing of covid-related supply and input costs issues, coupled with the revival of out-of-home channels.

Domino’s Pizza Enterprises ((DMP)) was a prominent victim of these straitened times, with its profit down -75%. While that’s a mighty slice off the profit pie, the pain was foreshadowed in a mid June update and the stock surged 12% post-results.

To his credit, founder and CEO Don Meij admits Domino’s erred in pushing through price rises to combat “extraordinary” inflation and had moved to rectify the problem.

Domino’s investors were also comforted by a strong sales uptick for the year to date, both locally and in Europe.

Speaking of fast food, what are the key takeaways from the reporting season?

There was nothing too dire that suggests a pending, while plenty of companies also referred to easing input pressures.

Corporate balance sheets are also robust.

As attested to by the likes of Wesfarmers ((WES)), Super Retail ((SUL)) and The Reject Shop ((TRS)) the retail sector looks ropey, but far from dire.

The real estate investment trusts (REITs) are holding up well, although it’s probably too early for the office sector damage to show post-pandemic.

In some cases, the market’s reaction to the results were confounding. For instance, good ol’ Telstra ((TLS)) managed a 13% profit rise to $2.05bn, but the telco’s shares fell -6% in the three trading days post results.

Other notable share moves had nothing to do with results: for instance Premier Investments ((PMV)) saw its shares 12% leap on its plans for a four-way split of its retail operations. Shares in Iress ((IRE)) cratered on suspension of the financial data provider’s interim dividend, following the sale of its managed funds administration business.

Investors shouldn’t read too much into the subdued numbers from Rio Tinto ((RIO)) and BHP Group ((BHP)), given the resource majors will rise or fall on the back of commodity prices – notably iron ore.

But Chinese economic dynamics are beyond the ken of even the most diligent sinologists – so keep calm and carry on, everyone.

This article does not constitute share recommendations and readers should seek their own financial advice from a properly qualified party

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