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Rudi’s View: Week 3 – Not As Good, But Not Bad

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Feb 28 2024

This story features REA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: REA

Week 3: Not As Good, But Not Bad

By Rudi Filapek-Vandyck, Editor

As the local corporate results season went through its third week, it became obvious the heavy skew towards positive surprises could not be maintained.

As it turned out, the busiest week of the season (involving some 40% of the ASX200 market cap) saw the number of misses and disappointments rise quite quickly, without destroying the positive sentiment that has prevaled throughout this season.

To illustrate what is happening in February, we might as well rely on the FNArena Corporate Results Monitor.

-Week One had total 'beats' on 52.4% with only one disappointment from REA Group ((REA)) on a strong performance with increased investments to be made.

-By the end of Week Two the Monitor had 'beats' on 41% -still strong by historical standards- with disappointments rising to 22%, still low by historical comparisons.

-By Friday, week three ended with 'beats' on 38% and 'misses' on 28%.

To put some perspective around these numbers: if they were maintained throughout the closing week, this would still be the third best February season since 2014, as far as percentage of 'beats' is concerned.

But then the percentage of misses is also the fourth highest for the period.
 
Conclusion: it's a polarised market out there, and results season is showing just that.

By late on Monday, as I am writing this week's update, the percentages have changed to 36.3% 'beats' and 26.7% 'misses'.

Still, those with a positive outlook can seek solace from the fact nearly three out of four corporate releases either meets or beats forecasts. Plus the number of spectacularly negative market updates a la Nuix ((NXL)) or Appen ((APX)) or EML Payments ((EML)) in the past has remained quite limited thus far.

That said, most investors would still like to avoid share price punishments for the likes of Corporate Travel Management ((CTD)), Lendlease ((LLC)), Strike Energy ((STX)), The Star Entertainment Group ((SGR)), Nanosonics ((NAN)), and MA Financial Group ((MAF)) if they can.

Overly popular Pro Medicus ((PME)) can claim the title of fastest recovery this season.

After releasing interim results that simply weren't splendid enough, the subsequent punishment lasted three days, before the shares rallied back to just under $100. Still well below the $111 price level pre-result, but also well above the below-$40 level from mid-2022, and the mid-$70s level in late October last year.

Zooming in on the large percentage of earnings beats, consumer related businesses have on average posted better-than-forecast performances, online marketer Kogan ((KGN)) the latest example on Monday, with strong results also coming from multiple quality growth companies, including those carried by megatrends such as data centres (it's not solely a US phenomenon).

Examples are a-plenty; from Block ((SQ2)) to Aussie Broadband ((ABB)), Bega Cheese ((BGA)) and a2 Milk ((A2M)), to Audinate Group ((AD8)), Cochlear ((COH)) and ResMed ((RMD)), to Goodman Group ((GMG)), to Car Group ((CAR)), to Ampol ((ALD)), ARB Corp ((ARB)), Cettire ((CTT)), JB Hi-Fi ((JBH)), and Wesfarmers ((WES)), and numerous others.

The turnaround story this month looks like it might be the spectacular reversal of fortune through new management at Bravura Solutions ((BVS)). Another eye-catcher was delivered by Cobram Estate Olives ((CBO)).

Overall, many businesses managed to outperform not necessarily because of more sales, but more so because management teams have developed a better grip on cost control.

Cost control and better margins are closely inter-connected. Better margins have proved the secret formula for more 'beats' than 'misses' this month.

The Negatives

Are there any obvious negatives that are worth paying attention to?

A remarkably large number of dividend payouts went backwards and/or missed expectations. While in various cases this was related to the need for a step-up in investments, this is far from the complete picture and will need to be investigated further.

UBS strategists report, on their numbers some 29% of reporters to date have paid out less than last year, while 35% has lifted their dividend payment.

Also important is companies reporting a loss in operational momentum into the fresh calendar year.

This has put a number of such companies among the disappointers this month. But even if it didn't, a worsening of sales volumes is probably the number two of big risks that hovers over the outlook for the rest of the year.

The number one risk is undoubtedly connected with central banks' intentions to start cutting interest rates, when the time is right.

Those with a more cautious bent in their character might consider better corporate dynamics are likely to keep such interest rate cuts further away into the future.

The burden from high interest rates remains one source for disappointment, still, and remains one big headwind for many an A-REIT, together with the ongoing process of asset values deflating. Offices remain the source of most pain for the sector.

As far as sectors go, resources stand out through negative forecasts and negative adjustments to forecasts, though telecommunication isn't exactly covering itself in glory either.

Staples disappointed through Woolworths Group ((WOW)) and spin-off Endeavour Group ((EDV)) while lots of uncertainty remains for smaller cap credit providers a la Humm Group ((HUM)) and Latitude Group ((LFS)), as well as specific sections of the healthcare sector.

Miners and energy companies stand out as the worst two sectors this month in terms of share price action.

IDP Education ((IEL)) and the lithium sector remain under heavy scrutiny from shorters.

Operational dynamics remain strong for building materials, contractors and engineers, insurers and insurance brokers.

Underlying, and despite the strong bias for beats & meets, earnings forecasts are, on balance, not improving.

The consensus forecast for FY24 EPS is still a negative -5.5%, having lost -0.6% thus far this month.

The consensus EPS forecast for FY25 is a positive 4.3%. The average local share market PE ratio sits around 16.2x, at the upper level of the historical range outside of the covid-years. The average dividend yield has crept up to 4%.

One of potential sources for further relief for corporate margins is a seeming stabilisation in labour market dynamics.

UBS strategists report of the companies the broker monitors, 72 have suffered FY24 EPS downgrades post results release, versus only 60 receiving a consensus upgrade. Six out of every ten companies reporting see their sales trajectory slowing with most management commentary referring to customers battling with cost of living pressures.

On UBS's number crunching, only 18% of companies has thus far increased guidance, while 19% has lowered guidance. No less than 92% of companies has reported a rising cost for servicing debt.

Meanwhile, corporate activity is unusually elevated with Alumina Ltd ((AWC)), one of the longest listed commodity producers locally, reporting a take-over approach from JV-partner Alcoa.

Today's news follows similar announcements regarding CSR ((CSR)), Superloop ((SLC)), Altium ((ALU)), Ansarada Group ((AND)), Boral ((BLD)), APM Human Services International ((APM)), Southern Cross Media ((SXL)), Link Group ((LNK)), Perpetual ((PPT)), Pact Group ((PGL)), Volpara Health Technologies ((VHT)), Pacific Smiles ((PSQ)), and Adbri Group ((ABC)), plus a few smaller deals.

The local index is up less than 1% from the 1st of January.

A full analysis of the season will be conducted next week.

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

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (20 since 2006); examples below.

(This story was written on Monday, 26th April, 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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CHARTS

A2M ABB ABC AD8 ALD ALU AND APM APX ARB AWC BGA BLD BVS CAR CBO COH CSR CTD CTT EDV EML GMG HUM IEL JBH KGN LFS LLC LNK MAF NAN NXL PGL PME PPT PSQ REA RMD SGR SLC SQ2 STX SXL VHT WES WOW

For more info SHARE ANALYSIS: A2M - A2 MILK COMPANY LIMITED

For more info SHARE ANALYSIS: ABB - AUSSIE BROADBAND LIMITED

For more info SHARE ANALYSIS: ABC - ADBRI LIMITED

For more info SHARE ANALYSIS: AD8 - AUDINATE GROUP LIMITED

For more info SHARE ANALYSIS: ALD - AMPOL LIMITED

For more info SHARE ANALYSIS: ALU - ALTIUM

For more info SHARE ANALYSIS: AND - ANSARADA GROUP LIMITED

For more info SHARE ANALYSIS: APM - APM HUMAN SERVICES INTERNATIONAL LIMITED

For more info SHARE ANALYSIS: APX - APPEN LIMITED

For more info SHARE ANALYSIS: ARB - ARB CORPORATION LIMITED

For more info SHARE ANALYSIS: AWC - ALUMINA LIMITED

For more info SHARE ANALYSIS: BGA - BEGA CHEESE LIMITED

For more info SHARE ANALYSIS: BLD - BORAL LIMITED

For more info SHARE ANALYSIS: BVS - BRAVURA SOLUTIONS LIMITED

For more info SHARE ANALYSIS: CAR - CAR GROUP LIMITED

For more info SHARE ANALYSIS: CBO - COBRAM ESTATE OLIVES LIMITED

For more info SHARE ANALYSIS: COH - COCHLEAR LIMITED

For more info SHARE ANALYSIS: CSR - CSR LIMITED

For more info SHARE ANALYSIS: CTD - CORPORATE TRAVEL MANAGEMENT LIMITED

For more info SHARE ANALYSIS: CTT - CETTIRE LIMITED

For more info SHARE ANALYSIS: EDV - ENDEAVOUR GROUP LIMITED

For more info SHARE ANALYSIS: EML - EML PAYMENTS LIMITED

For more info SHARE ANALYSIS: GMG - GOODMAN GROUP

For more info SHARE ANALYSIS: HUM - HUMM GROUP LIMITED

For more info SHARE ANALYSIS: IEL - IDP EDUCATION LIMITED

For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED

For more info SHARE ANALYSIS: KGN - KOGAN.COM LIMITED

For more info SHARE ANALYSIS: LFS - LATITUDE GROUP HOLDINGS LIMITED

For more info SHARE ANALYSIS: LLC - LENDLEASE GROUP

For more info SHARE ANALYSIS: LNK - LINK ADMINISTRATION HOLDINGS LIMITED

For more info SHARE ANALYSIS: MAF - MA FINANCIAL GROUP LIMITED

For more info SHARE ANALYSIS: NAN - NANOSONICS LIMITED

For more info SHARE ANALYSIS: NXL - NUIX LIMITED

For more info SHARE ANALYSIS: PGL - PROSPA GROUP LIMITED

For more info SHARE ANALYSIS: PME - PRO MEDICUS LIMITED

For more info SHARE ANALYSIS: PPT - PERPETUAL LIMITED

For more info SHARE ANALYSIS: PSQ - PACIFIC SMILES GROUP LIMITED

For more info SHARE ANALYSIS: REA - REA GROUP LIMITED

For more info SHARE ANALYSIS: RMD - RESMED INC

For more info SHARE ANALYSIS: SGR - STAR ENTERTAINMENT GROUP LIMITED

For more info SHARE ANALYSIS: SLC - SUPERLOOP LIMITED

For more info SHARE ANALYSIS: SQ2 - BLOCK INC

For more info SHARE ANALYSIS: STX - STRIKE ENERGY LIMITED

For more info SHARE ANALYSIS: SXL - SOUTHERN CROSS MEDIA GROUP LIMITED

For more info SHARE ANALYSIS: VHT - VOLPARA HEALTH TECHNOLOGIES LIMITED

For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED

For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED