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

Rudi's View | Feb 21 2024

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!