Feature Stories | 3:18 PM
Final stats and insights from a reporting season in February that decisively broke with the negative trend in earnings growth for corporate Australia.
By Rudi Filapek-Vandyck, Editor
When financial result releases from CommBank ((CBA)) and BHP Group ((BHP)) --the two largest index constituents in Australia-- are among the season's highlights, you know the Australian share market is in for a jolly good time.
The ASX200 index gained 4.10% (total return, including dividends) in February and banks and miners were key pillars under what many a market watcher has labeled a positive result season.
On UBS's statistics, positive earnings surprises outnumbered disappointments by two-to-one. Guidance upgrades outnumbered downgrades by three-to-one.
On Morgans' number crunching, 69% of dividend-paying companies increased their distribution in February.
Consensus forecasts had already risen dramatically before the results season started, as investors had gained more confidence in the swing to a better operational context for cyclicals and other laggards, and by the end of January the average EPS forecast for FY26 had already improved to 11.3%.
Five months earlier that number stood at 3%. By early March, forecasts have improved further to 14% EPS growth. It seems there was very little not to like about what corporate Australia was sharing with shareholders throughout February.
The conclusion drawn by stockbroker Morgans: "underlying result fundamentals remain the strongest we have seen in three years".
Economy and market remain ultra-polarised
Viewed from a more skeptical point of view, most of these fabulous statistics, and many a rallying share price, were fueled by higher, and further rising, commodity prices.
And sure, the banks made their contribution too via better-than-anticipated cost control and so-called positive jaws on higher interest rates and expectations for more rate hikes locally.
Outside of the two share market heavyweight sectors, the picture looks a whole lot less ebullient. This is also what shows up in the final statistics of FNArena's Corporate Results Monitor for February.
Inside a more 'normal' (less polarised) context, the aforementioned statistics would translate into a much higher percentage of 'beats' and a much lower percentage of 'misses', but only 10 additional results are required to perfectly balance last month's season over beats, misses and in-line results.
We'd also have to assume nine out of those ten results would disappoint with one positive surprise and all three variants would have a 33% share.
As the numbers stand, 130 results out of 380 for the season proved in-line with expectations (34.2%) while 129 'beats' (33.9%) did outnumber 121 'misses' (31.8%) and, admittedly, that is not always the case.
One year earlier, misses had crept up to 33% versus 32% in positive surprises.
But if anyone wants to see what a really great February reporting season looks like, try February of 2021 when 47% surprised on the upside and only 13% failed to meet forecasts.
The gap between pluses and minuses was equally wide in 2022, 2018, 2016 and 2015.
Large Caps & Ai De-ratings
This time around the pendulum swung in favour of cyclicals and yesteryear's market laggards (the 'value' side of the market) as well as in favour of Large Cap giants (see also CommBank and BHP) while many smaller cap companies continued to struggle and underperformed.
This is the key reason as to why the final statistics for the season don't seem to support the overwhelming enthusiasm that coloured views and opinions at the end of February.
Analysts at Macquarie made a similar observation. On their assessment, ASX100 Industrials posted net ‘beats’ of 23% in combination with a very low rate of ‘misses’ (only 7%).
In contrast, smaller cap industrials only ‘beat’ by a net 8% and their ‘misses’ ran up to 21%.
February was equally characterised by the fact earnings results and forward guidances didn't seem to matter for large segments of the market.
A global trend had developed whereby software companies and others that could potentially be disrupted by ongoing AI development were out of favour, and there was simply no stopping the downward sloping trajectory in share prices.
In February, many analysts responded by scaling back valuation multiples for technology-related companies and this, combined with many more disappointments at the smaller end of the market, is responsible for negative end outcomes in aggregate and average price targets of respectively -4.12% and -0.67%.
The irony here is February became the very first result season for the ASX wherein companies started communicating tangible results and benefits from employing and integrating AI in business processes.
There will be a lot more of the same in August and beyond, one would like to think.
Volatility is now a feature
Another trend that can no longer be ignored is share price volatility continues to rise.
One can blame nasty shorters and hedge funds, or algorithmic trading programs and quant modeling, even the fact most stockbrokers employ less analysts these days, which creates more gaps in forecasts and coverage, but the fact remains 5%-10% share price moves on the day have by now become more rule than exception.
On Morgans' data, the average punishment for disappointment from a Midcap company was -13% versus a 7.5% reward in case of a positive surprise.
For smaller cap companies, the comparable numbers are -8.6% (disappointment) and 5.1% (positive surprise).
‘Beats’ and “misses’ for ASX50 companies saw share prices on average move by respectively -10.2% and 5.8% on results day.
Sectors that mostly disappointed in February include healthcare, travel, US housing and technology, though the month's title for worst performer goes to large cap cyclicals; think Qantas Airways ((QAN)), Computershare ((CPU)), and Treasury Wine Estates ((TWE)).
At the other end of the spectrum, Midcap Growth crowned itself the surprise winner, led by the likes of Hub24 ((HUB)), Netwealth Group ((NWL)), IDP Education ((IEL)), and Reliance Worldwide ((RWC)).
February was equally the season when some long-time struggling businesses finally delivered a pleasing market-beating performance for their shareholders, including Aurizon Holdings ((AZJ)), AGL Energy ((AGL)), Baby Bunting ((BBN)), Magellan Financial ((MFG)), Orora ((ORA)), and Woolworths Group ((WOW)).
And as per always, some long-time stragglers had to ask their shareholders yet again for more patience, including Bapcor ((BAP)), Cochlear ((COH)), CSL ((CSL)), G8 Education ((GEM)), Healius ((HLS)), Inghams Group ((ING)), Lendlease ((LLC)), Sky City Entertainment ((SKC)), and Treasury Wine Estates.
Stockbrokers were unusually busy throughout the season with no less than 98 upgrades in ratings (the second largest number in the Monitor's history, only beaten by August 2015) as well as 47 rating downgrades.
The first number is even more remarkable once we realise there have seldom been as many Buy-equivalent ratings as there are today (65%-plus).
Yes, this share market remains extremely polarised.
The combined index weight of CommBank and BHP rose briefly above 20% in February, to reach its highest percentage ever. It has since retreated to circa 19% as late February/March brought along war in Iran and a big spike in global energy prices.
For the share market, all those gains from February have quickly disappeared, though the index remains in positive territory for 2026, as well as for the running financial year (even without dividends).
Investors can thank the banks and resources for that too.
The ASX200 exited February at a 24% premium versus its 10-year PE average.
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