Rudi’s View: August Paints A Bifurcated Picture

Rudi's View | Aug 21 2024

By Rudi Filapek-Vandyck, Editor

As per always, investors tend to experience reporting season through their own portfolio holdings.

Miss out on the few sharp punishments and own a number of positive surprises and we might feel chuffed about past choices and our predilection for selecting winners.

Own a few bombs and the game looks rigged against the small investor, with no surprise big enough to lighten the mood.

The share market can be a treacherous place, in particular during reporting season when one cannot be too certain in advance that whatever our companies share with the outside world will be liked and positively received.

And that's simply the financial performance over the six months or quarter past. What about management providing guidance on what is likely ahead?

Corporate results season in Australia is a slowly ramping up affair, and this means, broadly speaking and as has become the local standard, we still aint seen nothing just yet.

Today, on the 19th of August, the FNArena Corporate Results Monitor still only has reviewed 70 results.

That number will be closer to 400 in less than two weeks, so a lot can and will undoubtedly change as the numbers accumulate quickly from here onwards.

But we've had Rio Tinto ((RIO)), Goodman Group ((GMG)), CommBank ((CBA)) and CSL ((CSL)), ResMed ((RMD)) and Cochlear ((COH)), plus a whole series of smaller cap names and quarterly updates from the other Big Banks, so maybe looking at the early trends and observations might not be such a bad idea.

The first observation to highlight is the almost equal divide of those 70 reports over beats (23), meets (23) and misses (24). Before the season started, I had predicted notable polarisation because of ongoing inflation and other challenges, on the back of deteriorating economic momentum locally and globally, but this is almost a picture too perfect.

The FNArena Monitor combines financial outcome with forward guidance, if provided, and underlying those numbers is the fact many companies are able to meet analysts' forecasts for the past six months. It's the period ahead that is often the problem.

The dilemma investors are confronted with is whether management teams are too cautious when they look ahead?

Invariably, the share price receives a genuine shellacking as performance and guidance are measured against what analysts have embedded in their modeling. This is where things might get tricky because selling your shares into the instant punishment might not be the best decision to make.

I note, for example, CSL ((CSL)) shares were trading above $308 on August the 13th when FY24 was released with guidance that was lower than what was expected. The shares were punished for it, but today the share price is trading back above $308. And what to make of Audinate Group ((AD8)) first releasing a downbeat outlook for FY25 but then releasing a slightly better-than-flagged financial report which sees its shares rally by 20% on the day?

I mention both because both are owned by the FNArena/Vested Equities All-Weather Model Portfolio and I have been reminded by another investor recently that often the smartest investment decision to make is to do absolutely nothing. Hold that thought.

Two key differences with the recent quarterly reporting season in the US are that Australian companies are equally meeting or beating forecasts, but not because costs are falling. In Australia, the story behind FY24 results thus far is more about lower taxes and lower interest costs.

Inflation through input materials and staff remains a problem and this is also where most disappointments stem from. The other key difference is forecasts post corporate releases in the US have trended upwards; in Australia the net balance is for further decline. Business leaders Down Under are simply not equally as confident when looking ahead.

How much of this gap relates to the differences in messaging from the Federal Reserve and the RBA?