Feature Stories | Sep 13 2023
Download related file: FNArena-Reporting-Season-Monitor-August-2023
The August result season was not among the better ones, but it could have been worse.
-Beats/misses even
-Guidance of importance
-Dividends a factor
-Uncertain outlook
By Greg Peel
With the August result season now complete in 2023, the FNArena Corporate Result Monitor, which has been building throughout the month, is now complete and published in its final form here.
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 390 listed companies. By FNArena’s assessment, 112 companies beat expectations and 109 missed expectations, for a percentage ratio of 29/28% or 1.0 beats to misses. The aggregate of all resultant target price changes came in at a net 1.6% increase but on a simple average, targets fell -0.5%. In response to results, brokers made 50 ratings upgrades and 45 ratings downgrades.
The first FNArena Corporate Result Monitor was published in the August season of 2013. See table:
It’s a Small World
The first number that stands out on the above table is 390 – the number of companies covered by brokers monitored daily by FNArena and reporting in August.
Over the years, the list of brokers monitored daily by FNArena has evolved. Two brokers of note who were on the list when the Monitor began in 2013 were Merrill Lynch and Deutsche Bank. Merrills was swallowed up by Bank of America in the GFC, while Deutsche eventually succumbed to subsequent difficulties and closed its Australian office.
In the interim we picked up Morgan Stanley and local broker Ord Minnett, which was at one point aligned with JPMorgan and is now aligned with Morningstar. Between the February result season and this August, we lost Credit Suisse, which was swallowed up by UBS.
In order to counter that loss FNArena added two local, smaller brokers, in the form of Bell Potter and Shaw and Partners. While both are small compared to the likes of a Macquarie or offshore names, they do cover a much wider range of small and even micro-cap companies than the big brokers, taking the Monitor’s coverage well outside that of the ASX200.
This evolution has resulted in the Monitor assessing an average of 315 stocks between February 2015 and August 2020, 345 between February 2021 and February 2023, and last season, 390.
It must also be noted not all of 45 stock gain is simply down to the extended coverage of the two new brokers. The “new world” metal/mineral revolution driven by EVs, batteries and all else electric has seen brokers large and small extend their coverage of the likes of lithium, graphite, cobalt and rare earth miners – some already large operations, some just starting out.
Among the small companies added to the monitor thanks to the new brokers, biotechs feature heavily.
In addition to all of the above, the share market is a dynamic open forum which sees companies acquiring and being acquired, and listing and delisting at regular intervals, with direct impact on brokers' coverage, and our Monitor too.
The Monitor now provides assessment of a wider spectrum of the Australian economy beyond just the banks, big miner/drillers and big retailers that dominate the cap-weighting of the Australian market.
To that end we note only 160 of the 390 results assessed this season were those of ASX200 constituents. The other 230 are found in the ASX300, All-Ords (500), or are even yet to qualify for an index.
While the full 390 companies reported as good as an even number of beats to misses (112 to 109), among ASX200 companies, 49 beat and 55 missed.
The Numbers
The result of 29/28% beats to misses compares to an average in the past decade of 33/24%. On a ratio basis, 1.0 for this season compares to an average of 1.4.
On only three other occasions has the ratio been 1.0, being both February and August seasons in 2019 and the August season of 2017, and only once has the ratio dropped below 1.0 — last February (0.9).
On that basis, it was a weak season.
On the basis of resultant broker up/downgrades (50 to 45 or 1.1), it was a reasonable season, with the average being -0.4 (more downgrades). On average, target prices decreased by -0.5% while the historical average is +2.2%. If we consider that ceteris paribus, the average target rises on "rolling forward forecasts", meaning adding another year's forecast earnings on the end of the valuation model, then negative target prices moves are just that — negative.
The aggregate of all 390 price targets did move up by 1.57% in August.
As I note every season, result beats to misses are typically around a 60/40% affair, for the reasons that (a) managements prefer to provide conservative guidance and beat it, rather than be punished on a miss, and (b) stock analysts prefer to mark down forecasts and be beaten rather than go high and be missed. No one blames an analyst for being beaten, but if missed, it’s not a good look.
The percentage of in-line assessments this season was 43%, smack on the ten-year average. While in many cases results do indeed fall in line with analyst forecasts, this steady average lends itself to a great extent that the Australian market these days unofficially reports on a quarterly basis, while providing formal results twice a year.
Thus the monitor is scattered with results “in line with the June quarter update”. And while this season’s preceding “confession season” was not as significant as in the past, there were still plenty of companies providing refreshed guidance updates heading into the results season, or pre-releasing headline numbers.
In such cases, those quarterly or “profit warning” updates (which can also be positive as well as negative) would have prompted an appropriate share price response on that day, not when the formal result landed.
The Macro Picture
It would be handy if the world just stopped for the months of February and August, thus allowing the day’s earnings results to be assessed purely on a micro basis, with no interference from sentiment driven by macro news. But alas, this is not the case.
Over the month of August, the ASX200 fell a net -1.4%. However, to August 21 the index fell -4.0% before rebounding 2.7%. So it was one of the more volatile seasons in terms of the macro overlay.
It is notable that August 1 saw the index hit its highest level since February, while August 31 was the highest level since the bottom on August 21.
Falling global inflation, hopes of central bank tightening reaching a peak, and hopes of “soft landings” in both the US and Australia drove positive sentiment up to and during result season, only to be offset by rising bond yields as a result of soft landing expectations, and disappointment over China’s failing covid recovery and muted stimulus response from Beijing.
The problem with a volatile market is that the responses to each day’s earnings releases is biased by market sentiment. A good day on the market may boost upside from a beat and limit downside, while a bad day will limit upside and may send “missing” companies crashing.
One feature that stood out this season – more so than seasons past – is the number of companies that saw their share prices move one way on result release, only to completely reverse the next day.
First Responders
This can be put down to the “buy/sell first ask questions later” propensity of day-traders, in recent years exacerbated by those day-traders being of the hyper-speed digital variety. One problem is that for some unknown reason, Australia remains focused on the profit line as being the benchmark of a result. As is noted in the Guide above, profit is not necessarily a reliable benchmark at all.
Aside from the usual one-offs that impact on profit, rendering a result somewhat misleading, in a season in which earnings fell on a net basis due to several reasons, but call them “inflation”, forward guidance has been as important or more important to inform share price responses.
One factor that stood out in this season was an increased focus on capital expenditure. In a lot of cases, particularly in the resource sectors but extending to other sectors as well, including tech, increased/decreased capex leading to a miss/beat on earnings guidance was critical to responses on the day. It then comes down to whether the increase/decrease is a good/bad thing.
Which is where stock analysts come in, and why many a company saw a share price reversal the day after the result once analysts had published their own assessments. Increased capex can be bad, if it implies a project is going to cost a lot more than first assumed, or good, if it is an investment that accelerates future earnings.
Decreased capex can be good, if a project is going to cost less than first assumed, or bad, if it is because a company has backed down on its investment goals.
Capex aside, there can be many other reasons an analyst might determine a result to be a lot better/worse than it appears at face value.
At the Margin
Earnings margins are always an important metric, but this season saw arguably a greater focus than in the past. The reason is aforementioned inflation.
Note that FY23 (July to June for most companies reporting in August) saw Australia’s headline CPI rise from 6.1% in June 2022 to 7.8% in December 2022 and back to 6.0% in June 2023. In response, the RBA lifted its cash rate from 0.1% in May 2022, to 4.10% in May 2023.
This alone means Australian companies faced, and will continue to face, much higher financing costs. Throw in labour shortages – the scourge in FY23 of the resource companies in particular – and we also have wage cost inflation, alongside input cost inflation for relevant businesses.
While covid might seem but a distant nightmare here in Australia, we recall that China only came out of lockdown at the beginning of 2023. Thus one of the most influential factors of result seasons post 2020 – supply chain constraints – still lingers in what is proving to be a very long-tail covid recovery period globally.
And don’t mention the war.
With the cost side of the earnings equation elevated, there are two ways a company can maintain earnings margins – cut costs, or raise prices. While more of a focus in past post-covid seasons, surprises on the cost-cutting side were again relevant this season, leading to margin stability and result beats.
As for price rises, the picture was mixed. Some companies were successful in raising prices while maintaining sales volumes, some were not. Some were unable to raise prices, leading to a fall in margins. It comes down to what Morningstar likes to call a company’s “moat”.
In order to raise prices and not lose volumes, a company much have a sufficient “moat”, or barrier to entry, that ensures a grin-and-bear-it response from households/businesses who have little choice but to pay up. Here’s looking at you, Alan Joyce.
In more competitive industries, price rises may lead to a reduction in sales. This is particularly notable in the discretionary retail sector. Within that sector, there were distinct winners and losers this season.
Dividends
Net dividends declared fell -2.5% this season from a year ago. Total dividends are forecast to fall by -8% in the year ahead. While dividends are always important, there was a particular focus this season which aside from actual result or forward guidance, led to a beat/miss and subsequent share price response.
While the banks are still doing their bit, although not to the extent of the glory days post-GFC, it were the resource sectors that provided most of the dividend weakness. That said, not all lower dividends proved a disappointment compared to expectations.
The obvious reason why resource sector dividends were lower was because commodity prices were lower, coming off war-driven peaks and reflecting China’s failure to reach post-covid escape velocity. Mind you, iron ore prices have held up reasonably well compared to analyst expectations and oil prices have rebounded significantly since June.
Another reason is many a miner or oil/gas producer is in the process of investing in new projects, or looking at potential projects, or potential growth through acquisition. Growth projects, while promising for future earnings (assuming analysts agree a project is a good investment) require money to be set aside for aforementioned capex, rather than handed out gaily to shareholders.
Let’s face it – investors in miners/driller have enjoyed a bonanza of dividends in past years when back in the mists of time, they were among the lowest dividend payers. All good things must come to an end.
The Outlook
You tell me.
Is inflation being sufficiently tamed? Will central banks stop raising rates? Will economies slow down or recede? If so, will the landing be hard or soft? Will central banks start cutting in response? Will China’s post-covid rebound ever eventuate?
On the home front, is Australia’s much anticipated house price crash already over (and as far as crashes go, it’s been a bit of a fizzer compared to forecasts) or is the impact of the “mortgage cliff” yet to really play out?
Will the Australia consumer succumb to the cost of living crisis? Result season suggested pain but not as much as feared. Will unemployment ever rise? That will inform the above.
Will the war ever end?
While it takes two sides of an argument to make a market, it is notable that expectations from Wall Street analysts and commentators remain polarised at this point. We entered 2023 with most assuming a recession in the US, which is yet to happen, but will, according to the bears, and won’t, according to the bulls.
Surveys taken frequently on US business channel CNBC keep coming up close to 50/50, or if anything a little more biased to the bulls at this point. But the bears remain adamant. It’s all about the lag effect of rate rises.
Then there’s AI.
One thing that can be relied upon is that a post-pandemic world is not one anyone alive has ever experienced, which suggests the historical playbook can go out the window. As is oft noted, many a younger investor/market participant has never known anything other than near-zero interest rates.
Toto, I don’t think we’re in Kansas anymore.
For a more stock-specific assessment of the August result season, please see Weekly Insights, editions published on September 6 and 13.
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