Rudi's View | Aug 14 2024
This story features AMP LIMITED, and other companies. For more info SHARE ANALYSIS: AMP
In this week’s Weekly Insights:
-August Results: Early Beginnings
-FNArena Talks
By Rudi Filapek-Vandyck, Editor
August Results: Early Beginnings
Share price movements are not the most reliable indicator thus far in July and August.
Contrary to what investors might assume, the Q2 corporate earnings season in the US is not a big failure.
Share price weakness over there is more plausibly explained through Gen.Ai scepticism and macro-inspired investor angst. Forced selling because hedge funds and others got burned through the yen carry trade hasn’t helped either.
In flagrant contrast with weak sentiment in the first two weeks of August, believe it or not, corporate performances in the US have mostly surprised to the upside, including trading updates and forward-guidances delivered. On data crunching undertaken by S&P Global Market Intelligence, Q2 EPS growth for the S&P500 has improved to 12.03% from 8.17% over the past four weeks.
That’s one big jump in defiance of widespread concerns about too high valuations carried by too high expectations.
US financials have thus far led the positive surprise, as well as consumer discretionary companies. The big disappointment is the energy sector. S&P Global’s consensus snapshot as per August 9th is shown below.
In terms of general statistics, 77.9% of companies reported have beaten EPS estimates and 62.3% of companies reported have beaten Revenue estimates, with 53.9% beating both EPS and Revenue.
Note how the percentage of EPS beats remains higher than top line beats, with both percentages better than the prior Q1 season.
One thing that stands out is those companies beating expectations are not by definition rewarded for it.
To experienced market observers, this means macro drivers are currently dominating investor sentiment and short-term trends. Add ongoing investor angst about elevated asset prices and it’s probably fair to observe corporate earnings have been relegated to the back burner, unless they’re well off the mark in a negative sense.
Deteriorating economic indicators might have re-opened the public debate about a recession or not for the US economy later this year, analysts at RBC Capital have spotted no confirmation in transcripts from corporate conference calls with investors these past number of weeks.
Rather, they say, most commentary seems to confirm the US economy is slowing, but so far without any dramatic consequences. Consumer spending appears less impacted at the higher end of society, which is not dissimilar from observed dynamics in Australia and elsewhere. General caution remains directed at the situation inside China. Inflation pressures are abating.
RBC Capital found references to ‘uncertainty’ and ‘risk’ have been much lower than in 2016 and 2022. As the Q2 reporting season winds down, RBC Capital analysts report “we remain struck by how solid the overall stats look”. Results and forecasts for technology companies have remained positive.
Results In Australia
In Australia, the season for corporate earnings updates is only gradually warming up. An acute shortage in experienced accountants is, apparently, responsible for most local companies releasing their financial numbers late in the month.
On Monday August the 12th, when I am writing these sentences, the FNArena Corporate Results Monitor still shows assessments of 24 updates only. In February, the total number of market updates accumulated to 387 throughout the season. This gives us a good insight into where we stand today, and what is yet to come over the three weeks ahead.
On FNArena’s assessment, 10 out of the first 24 companies managed to outperform expectations, which is a relatively high percentage (41.7%) but nine updates disappointed and that’s a high percentage too (37.5%). The first contrast with US equities is that outperformers locally still are being rewarded, if not on the day of release, then as soon as the macro allows it.
That observation stands for AMP Ltd ((AMP)), Car Group ((CAR)), JB Hi-Fi ((JBH)), Life360 ((360)), Light & Wonder ((LNW)), News Corp ((NWS)), Pinnacle Investment Management ((PIN)), REA Group ((REA)), ResMed ((RMD)), and Vista Group International ((VGL)).
The added observation is that six stocks out of that list are part of the higher-valued market segment that has been responsible for most of the local share market’s gain throughout the year past. In other words: a strong performance on above-average PE multiples is not by definition a deterrent for further upside (this is even more the case when the result forces analysts to upgrade forecasts and their valuation).
In line with observations made in past reporting seasons, often a strong share price performance (and above average PE) is merely a reflection of the market’s confidence this company is performing well, with more to follow. More often than not, on my observations, reporting season tends to confirm that confidence is warranted.
Not all the companies mentioned have as yet been fully assessed (the Monitor waits for analysts responses and they are not instant) but early indications are if companies surprise positively the average price target from the brokers monitored daily moves higher. The only exception to date has been Champion Iron ((CIA)), producer of iron ore.
Among the disappointments to date we find Audinate Group ((AD8)), Aurizon Holdings ((AZJ)), Mirvac Group ((MGR)), QBE Insurance ((QBE)), A-REITs Centuria Industrial REIT ((CIP)) and Charter Hall Long WALE REIT ((CLW)), and Rio Tinto ((RIO)). The latter reported only a small miss in the bigger scheme of things, its share price more a reflection of China troubles and US economic uncertainty.
But what this list shows is that hiding in underperforming, cheaper-priced laggards does not by definition equal a lower-risk strategy. A-REITs have been trading at sizable valuation discounts for the best part of three years now but analysts keep warning the sector is still subjected to falling asset valuations, higher operational costs, too much debt, and a lack of growth and positive catalysts.
Two early disappointments from the two REITs releasing market updates might be enough evidence already analysts’ caution is simply warranted.
Might the same observation prove as equally apposite following more disappointment from the likes of Aurizon Holdings and Mirvac Group? Shares in the former are trading near an eight year low while Mirvac shares are at a similar price level as during the peak of the covid sell-off in 2020 but there has been no short-term respite for long-suffering shareholders.
The strong and resilient versus the weak and vulnerable. Whereas most commentators elsewhere only look at the share market in terms of low(er) and high(er) share price valuations, my experience shows result seasons tend to reveal which businesses are strong and resilient and which ones are of lower quality and much more fragile when confronted with macro-economic challenges.
As shown by the relatively high number of earnings ‘misses’ to date, those challenges remain tangible and large. QBE Insurance never quite manages to update without disappointment lurking somewhere, but at this point positive momentum for the insurance cycle dominates the outlook. AMP, for the first time in a long while, has most analysts adopting a more supportive view as the business no longer operates in freefall.
The first shock of the season has come early in the month with young and upcoming conqueror of the global sound industry, Audinate Group, surprising with lower sales and lower profits for the year ahead. All kudos to Macquarie who’d issued a warning before Audinate pre-indicated its FY24 numbers and FY25 guidance.
The irony resides with Morningstar whose technology analyst doesn’t like much listed on the ASX, certainly not the likes of Xero ((XRO)) or TechnologyOne ((TNE)), but then in particular developed a liking for Audinate Group (target of $23 in May).
Equally telling, those same analysts at Macquarie upgraded back to Outperform once the news was out and Audinate shares had received a good old shellacking from traders and dismayed investors.
How best to interpret what has happened? Having given this plenty of thought, I’ve come to the conclusion Audinate’s disappointment is simply the risk that comes attached to your typical small cap company.
Easily forgotten, but this is still only a business that sells less than $100m a year in products and services. Any set back in the order of -$10m has an outsized impact and that’s exactly what has happened.
This does by no means imply there are no further risks, and we still have to wait and see how management at the firm deals with ongoing growth pains and operational challenges.
By all accounts, and by most assessments made, Audinate should still have the capacity to develop the global industry standard for digital sound networking. However, similar as with experiences elsewhere (think lithium, cannabis, et cetera) not all megatrends are equally as strong and company size matters.
For more on the company, FNArena published the following on Monday: https://fnarena.com/index.php/2024/08/12/first-shock-of-the-season-whats-next-audinate/
On balance, there’s plenty to like from the early batch of local results. But there’s a lot more to come. Too early to draw firm conclusions as yet.
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FNArena’s Reporting Season Monitor (now updated daily): https://fnarena.com/index.php/reporting_season/
FNArena Talks
-Pre-results season interview with Ally Selby at LiveWire Markets: https://www.livewiremarkets.com/wires/rudi-why-csl-could-be-headed-for-500
-Danielle Ecuyer talks with The Australian’s James Kirby on The Money Puzzle podcast:
https://podcasts.apple.com/au/podcast/if-the-market-has-recovered-shouldnt-you-be-bargain-hunting/id1201031401?i=1000664692977
FNARENA VIDEO
Dani and I have put together a video to explain our focus (and enthusiasm as investors) for GenAi, the fourth industrial revolution:
SPECIAL REPORT
Last month, FNArena published a 78 pages Special Report on GenAi, the fourth industrial revolution with lots of in-depth insights, forward projections, and useful links to companies for investors in the Australian stock exchange.
This Special Report remains exclusive for paying subscribers. Download your copy via the Special Reports section on the website.
Model Portfolios, Best Buys & Conviction Calls
This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).
FNArena Subscription
A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (21 since 2006); examples below.
(This story was written on Monday, 12th August, 2024. 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
For more info SHARE ANALYSIS: 360 - LIFE360 INC
For more info SHARE ANALYSIS: AD8 - AUDINATE GROUP LIMITED
For more info SHARE ANALYSIS: AMP - AMP LIMITED
For more info SHARE ANALYSIS: AZJ - AURIZON HOLDINGS LIMITED
For more info SHARE ANALYSIS: CAR - CAR GROUP LIMITED
For more info SHARE ANALYSIS: CIA - CHAMPION IRON LIMITED
For more info SHARE ANALYSIS: CIP - CENTURIA INDUSTRIAL REIT
For more info SHARE ANALYSIS: CLW - CHARTER HALL LONG WALE REIT
For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED
For more info SHARE ANALYSIS: LNW - LIGHT & WONDER INC
For more info SHARE ANALYSIS: MGR - MIRVAC GROUP
For more info SHARE ANALYSIS: NWS - NEWS CORPORATION
For more info SHARE ANALYSIS: QBE - QBE INSURANCE GROUP LIMITED
For more info SHARE ANALYSIS: REA - REA GROUP LIMITED
For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED
For more info SHARE ANALYSIS: RMD - RESMED INC
For more info SHARE ANALYSIS: TNE - TECHNOLOGY ONE LIMITED
For more info SHARE ANALYSIS: VGL - VISTA GROUP INTERNATIONAL LIMITED
For more info SHARE ANALYSIS: XRO - XERO LIMITED