Rudi’s View: More Beats In Early Feb Results

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More Beats In Early Feb Results

By Rudi Filapek-Vandyck, Editor

If everything goes to plan, the RBA will deliver its first rate cut since 2020 at Tuesday’s board meeting.

Whether this will be supportive of further share market gains remains to be seen as forward-looking equities have, of course, already responded to the local bond market that has made Tuesday’s rate cut pretty much a done deal.

Meanwhile, in the background of it all, the public debate has shifted from will they/won’t they to how many rate cuts should we expect this year?

The bond market is suggesting at least three and potentially four rate cuts are on the agenda. Plenty of voices around think that’s too optimistic. So what happens if/when the RBA cuts and then signals a la Jerome Powell there’s no hurry to follow up with another one until more clarity emerges about what’s going on in the world generally?

The ASX200 is trading on an average Price-Earnings (PE) ratio of 18.2x which, no matter how one cuts the numbers, remains well above past averages. One comparison is the multi-decade long average which is around 14.7x. The average for the past ten years is around 16x.

In the US too forecasts for the next Fed rate cut are currently being pushed out towards September or beyond. A similar observation can be made about share market valuations over there. The current quarterly reporting season does not carry the same halo as its predecessors from the past 18 months.

Depending on what exactly we focus on, there’s an argument to be made US corporate result outcomes thus far have a slight negative skew, without trying to make this a major development in itself. But the Fed is now on pause and there’s plenty to worry about in and around Washington, or at least there’s plenty of uncertainty.

US equity markets, throughout all their rallies and turbulence, are essentially at their levels from December. This is very different from the picture that dominates equity markets in Europe and in Asia. Even the ASX200 looks to be carving out what looks more of an ongoing uptrend on price charts, culminating into a fresh all-time record high on Friday.

Co-responsible for the local share market’s positive performance thus far in February, following on from an already positive January, has been the positive trend in the first two weeks of the local results season. With investor optimism riding high and the domestic economy holding up reasonably well, the first 50-odd corporate releases have, on average, generated much better outcomes than what we witnessed in both results seasons last year.

 Despite all the criticism about a share price that cannot possibly be justified, in isolation, the interim release from CommBank ((CBA)) did not sour the mood and financial performances from Ansell ((ANN)), Computershare ((CPU)), JB Hi-Fi ((JBH)), News Corp ((NWS)), Nick Scali ((NCK)), Pinnacle Investment Management ((PNI)), ResMed ((RMD)), SGH Ltd ((SGH)) and Temple & Webster ((TPW)) all turned out better-than-forecast, even if not all have been immediately rewarded for it.

As is also apparent from FNArena’s weekly update on ratings, price targets and earnings forecasts ( see: https://fnarena.com/index.php/2025/02/17/weekly-ratings-targets-forecast-changes-14-02-25/ ) adjustments made to analysts’ valuations and forecasts have been much larger than downgrades applied.

But here follows the sobering truth: the numbers in Australia thus far are still relatively low and most reporting seasons start off on a positive note. Let’s call it the nature of the beast. By early March the FNArena Monitor will contain updates on circa 390 companies. On Monday, when I am writing these sentences, the corresponding number is still only 57.

FNArena’s Corporate Results Monitor: https://fnarena.com/index.php/past-corporate-results-analysis/

Indeed, on Monday shares in Bendigo and Adelaide Bank ((BEN)) are trading down by double digits as margin pressure surprised to the downside. A quarterly update by Westpac ((WBC)) equally did not please, and neither did updates by AMP ((AMP)) on Friday and Insurance Australia Group ((IAG)) before that.

A pre-result guidance by Woodside Energy ((WDS)) has confirmed market worries about the sustainability of the energy producer’s dividend.

Sector analysts at Citi have not been in favour of owning shares in Australia’s largest energy producer for a long while now (and correct about it too). Following Woodside’s market update, they have decided to open a 30-day Downside Catalyst Watch on the shares, which essentially implies they see the share price weakening further.

As also shown in Stock Analysis on the FNArena website, analysts are already anticipating ongoing dividend cuts by Woodside, with the dividend projected to fall from US253c in 2022 to US82c by late 2025. I guess the question now is: how much lower will these numbers go?

For good measure: Monday’s results also offered plenty of good news releases as shown by share price responses for a2 Milk ((A2M)), Audinate Group ((AD8)), BlueScope Steel ((BSL)), and GPT Group ((GPT)).

In contrast, shares in perennial struggler Aurizon Holdings ((AZJ)) have sunk to a fresh 13-year low as yet another operational result was unable to meet analysts’ forecasts.

This company is often –erroneously it needs to be emphasised– hailed as a local Buffett stock and many a domestic ‘value’ investor carries it in portfolio, only to see the share price continuing its stretched-out, long-winded downtrend.

On my observation, many a shareholder is not even that sad about it, instead focusing on the fact the shares continue offering a high yield; currently estimated at 6.1% and 6.9% for this financial year and FY26, plus 60% franking on top. Seldom does any of those shareholders mention the decline in capital which is now almost -50% from pre-covid 2019.

Make of that what you like. But collecting high yielding dividends while seeing your capital erode away is not my idea of a great investment.

Aurizon Holdings is not the only company in Australia for which expectations for a successful turnaround have come too early this season. That list will continue to grow this month as RBA rate cuts haven’t happened yet and there may not be as many as hoped for.

In addition, many operational headwinds remain in place, including for Amotiv ((AOV)), AMP, CSL ((CSL)), Cochlear ((COH)), Lendlease ((LLC)), Orora ((ORA)) and Treasury Wine Estates ((TWE)).

Countering the early enthusiasm from February results, FNArena’s Monitor is showing more ‘misses’ than ‘beats’ for both the ASX50 and the ASX200 to date. That’s far from an excellent start, even if these numbers might look better once we include updates for Monday’s results.

We should all have a much better insight by week’s end, even if that still leaves the final week with plenty of questions to be answered.

Meanwhile, analysts at Macquarie are pondering whether expectations for the Finance sector had become too optimistic, with results to date noticeably polarised. See the ASX ((ASX)), AMP, Bendigo and Adelaide Bank, Insurance Australia Group and Westpac versus CommBank and Suncorp Group ((SUN)).

Combining all 57 result assessments thus far, the pendulum is still very much in favour of ‘beats’ (36.8%) with 33.3% of releases in line with forecasts, and the remaining 29.8% falling short of expectations. Those numbers, if sustained, would make this a better season than August and February last year, but let’s not get ahead of ourselves.

There will be plenty of swings and roundabouts in the two weeks before March.

****

See also:

https://fnarena.com/index.php/2025/02/17/rudi-interviewed-turning-laggards-into-winners/

https://fnarena.com/index.php/2025/02/13/rudis-view-bhp-capstone-copper-nextdc-wisetech-woodside/

https://fnarena.com/index.php/2025/02/12/rudis-view-hope-trumps-uncertainties/

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(This story was written on Monday, 17th February, 2025. 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).

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