Rudi’s View: More Winners Than Losers In Mid-February

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More Winners Than Losers In Mid-February 

By Rudi Filapek-Vandyck, Editor

Reporting seasons in Australia have become a second half (of the month) tsunami affair and by this time twelve months ago the FNArena Corporate Results Monitor had already covered close to 100 results against 68 only as at Friday.

The week ahead will see circa 40% of the ASX200's market capitalisation report financials, followed by a long tail of mostly smaller cap peers lined up for the final week.

By the time the dust settles, the Monitor will have made post-result assessments for close to 400 ASX-listed companies.

In brief: a lot can happen between now and the end of the month as far as final judgments are concerned, but there's no denying the optics are positive thus far, and so too are the early signals and statistics.

The FNArena Monitor has 'beats' running above 41% -well above average- and 'misses' at 11%, well below average.

To put both numbers in perspective: February last year saw 33% of all companies missing market forecasts with only 29% beating expectations. The numbers for August were much more balanced; 28% 'misses' versus 29% 'beats'.

The heavy skew towards 'beat's and 'meets' in the first half this time around has unmistakably injected renewed optimism into what already was a risk-on environment led by the prospect of lower interest rates later in the year.

So where does this apparent turnaround in operational dynamics stem from?

It starts with reduced expectations on weakening economic indicators, but as it turns out, operational conditions in many instances are not as dire as could be, and many a management team has become better at managing cost pressures and supply-chain challenges. Many of the 'beats' to date have occurred on better-than-forecast margins.

Even then, it should not go unmentioned the biggest surprises in the first two weeks have occurred at the top line -revenues!- which suggests rather strongly economic momentum overall is in better shape.

It has triggered more optimism from the local strategy team at Morgan Stanley which is now suggesting corporate profits in Australia are bottoming, with positive implications for what comes next.

As far as the optics are concerned, 'meets' and 'beats' have overwhelmingly received positive rewards, while most punishments for results that didn't quite make the mark have largely remained benign.

Quality (And The Lack Thereof)

There are always exceptions, of course, and Monday's shock market update by Lendlease ((LLC)) might serve as a timely reminder that a 'cheap' looking share price is not a watertight guarantee for a positive return, certainly not for this former corporate high flyer that has been in Struggle Street for many years now (and its share price in an elongated slide downwards).

For someone who has come to appreciate the importance of corporate quality, Lendlease has, many years ago already, become one of your typical examples of a corporate has been. I do understand that for your typical value bargain hunter such considerations are not important, but those investors are yet again left licking their wounded ego this week.

Staying with the theme, it is my observation certain companies tend to always have plenty of room for operational misses and disappointments, with just about every results season revealing more niggles, unanswered questions and imperfections.

It doesn't mean such companies cannot generate a positive end outcome, but one cannot help but think those management teams require a lot of support from the sector and the economic cycle.

It's probably fair to say: beware when conditions change!

The first two weeks have seen more imperfections revealed in corporate results from insurers QBE Insurance ((QBE)) and Insurance Australia Group ((IAG)), as well as by Ingham's Group ((ING)), Telstra ((TLS)), and Seven West Media ((SWM)).

To be fair: a number of perennial corporate strugglers are finally turning the corner, or so it appears, including AMP ((AMP)), Downer EDI ((DOW)), and Magellan Financial ((MGF)).

February already has seen some spectacular share price responses, including for AGL Energy ((AGL)), Cettire ((CTT)), GQG Partners ((GQG)), Nick Scali ((NCK)), and Temple & Webster ((TPW)); all starting from arguably too lowly valued share prices guided by too low expectations.

Equally noteworthy have been the strong gains booked by shares in Audinate Group ((AD8)), Goodman Group ((GMG)) and Seven Group ((SVW)); none of whom looked particularly 'cheap' prior to the results release.

In particular small cap Audinate and blue chip Goodman Group are teaching investors an important lesson into how successful business transformations lead to (much) higher corporate valuations.

It wasn't that long ago when shares in Audinate were tracking sideways around the $8 mark. They are now trading above $20.

Goodman Group shares to many looked 'expensive' around $24. Now analysts are suggesting the future lays above $30. Clearly, the momentum to build more high-tech data centres around the world remains strong and Goodman Group is fully grabbing that opportunity.

To those who have been burned badly in lithium and in nickel, the message is not every megatrend is the same. Plus, of course, one simply cannot remove the cyclicality from commodities. Always is, always has been.

One striking negative thus far have been dividend announcements with companies including the ASX ((ASX)), Insurance Australia Group, QBE Insurance, and Whitehaven Coal ((WHC)) not simply missing expectations, but often also paying out less than in the year prior.

Macquarie has identified cyclical retailers and the media sector as the early season's respective winners and losers.

Not unimportant for overall market sentiment: Macquarie also notes large cap companies are front and centre of this month's positive surprises, with guidances provided by companies proving more powerful than EPS upgrades for post-release share price rewards.

Thus far, most guidances provided contain a positive undertone and Macquarie suspects many companies are still erring on the cautious side, in particular those reporting December-half numbers.

February Opportunities

Looking through the small list of corporate punishments thus far this month, it quickly becomes clear most disappointments have been caused by the profit margin missing market forecasts, though other reasons include higher spending, a recent acquisition underperforming, short-term guidance being too cautious and, in some cases, a little bit of everything.

While such disappointments lead to share price weakness in the immediate aftermath of the financial release, investors would be well aware there are cases in which significant share price weakness opens up longer-term opportunity through a lower purchase price.

Below are a number of such 'opportunities' according to analysts covering the sector and the company.

Breville Group ((BRG)) – As a major beneficiary of covid lockdowns and the trend to work-from-home, Breville Group shares are still trading below the levels witnessed in 2020 and 2021. This month's financial update missed market consensus, also because management refused to price discount and opted for margin protection instead.

While questions linger how much of the disappointment in half-yearly sales has been caused by the cost-of-living crisis that is dogging consumers worldwide, analysts suggest investors should take guidance from the strong growth achieved over numerous years.

There is plenty of market share still up for grabs, plus unexplored new geographies for what ultimately might be seen as more of a 'tech' story than purely discretionary retail.

The obvious observation to make is post-release share price weakness hasn't lasted for long.

CSL ((CSL)) – No need to debate it: the newsflow surrounding Australia's largest and most successful biotech is no longer 100% positive, but maybe investors should simply concentrate on 80% of this multinational that turned up in great shape in recent H1 results?

Management's track record suggests margin improvement will be achieved. Is the acquired Vifor really the dud Wilsons believes it is? I think we can all still remember the scepsis that followed the acquisitions of Behring and Seqirus and both have since grown into the major drivers supporting the aforementioned 80% of the business.

The failure of CSL112 has been a major disappointment as success would have provided CSL with another blockbuster product that would have facilitated the next phase of accelerated growth, but as every Buddhist knows, sh*t happens, on occasion, and life moves on.

The world needs more plasma, and related products, and CSL remains a key player, globally.

James Hardie ((JHX)) – Forgotten are the days of asbestos scandals and of management lying in local courts, James Hardie on occasion is labeled probably Australia's highest quality cyclical, but that doesn't stop the company from occasionally disappointing.

The company's future is closely intertwined with the building and renovating of properties in the USA where its fibre board solutions should continue grabbing market share.

A strong quarterly performance has been followed up with a conservative-looking guidance from management for the closing three months of FY24. Immediate punishment followed on the day, which has since been partially reversed.

Pro Medicus ((PME)) – February 2024 proved a whole new experience for shareholders in Pro Medicus. The shares can actually fall as well!

Given the enormous rally in Pro Medicus shares, 100% up since mid-2022, and the lofty multiples that became the result of it, it was always a big ask from management to release financial numbers that would yet again force analysts to upgrade forecasts.

It didn't happen, and the share price tanked by more than -20% in response. Are the shares still 'expensively' valued? Yes. Will they weaken much further? That's anyone's guess.

What hasn't changed is this remains one of the highest quality growth stories on the ASX, and that trajectory has not yet met its Waterloo, not by a long shot.

The question then becomes: at what point should investors sitting on the sideline decide to get on board? The answer to that question is very much determined by what the market decides to do in the short term.

Maybe those waiting to get on board are safest when moving through small steps?

Seek (SEK) – Out of the three dominant platform companies on the ASX -also including Car Group and REA Group- Seek has traditionally proved much more volatile and prone to temporary disappointments.

The simple explanation is that Seek is not as dominant in its core market and the company needs to fend off a lot more competition.

In practice, this amounts to more investment and more spending to stay on top of the pile for job advertisements. Is it the cyclicality of the labour market that caused this month's disappointment as management had to concede weakness in listings proved a lot greater than anticipated?

Those with a supportive mindset suggest it's time to start concentrating on better times ahead, because as day follows night, and the Australian economy starts improving again in, say, six months' time, labour market dynamics should pick up again.

That message has not completely been lost with Seek shares equally partially reversing the punishment that followed the release of H1 financials.

Other suggestions made include Beach Energy ((BPT)), as surely the ex-Santos CEO is going to right this ship, GUD Holdings ((GUD)), because problems at Auto Pacific Group will be fixed, and Data#3 ((DTL)) on cyber security and AI exposure, the forthcoming recovery in PC sales, but above all, the strong connection with Microsoft product sales.

By closing time on Monday, the FNArena Corporate Results Monitor had assessed a total of 82 financial results, of which 30 (36.6%) have beaten forecasts, 31 (37.8%) reported in line and 21 (25.6%) delivered a disappointment.

Thus far, the numbers don't look substantially different for the ASX50, the ASX200 and all reporters combined.

FNArena's Corporate Results Monitor: https://fnarena.com/index.php/reporting_season/ (updated daily, with calendar)

More about February results:

–https://fnarena.com/index.php/2024/02/19/rudi-interviewed-ongoing-potential-in-technology-growth/

–https://fnarena.com/index.php/2024/02/14/rudis-view-february-2024-is-a-blue-sky-affair/

–https://fnarena.com/index.php/2024/02/08/rudis-view-corporate-travel-hansen-iph-nextdc-macquarie-technology/

–https://fnarena.com/index.php/2024/02/07/rudis-view-february-trepidation/

–https://fnarena.com/index.php/2024/02/05/rudi-interviewed-megatrends-a-go-go/

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(This story was written on Monday, 19th February, 2023. 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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