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FNArena Reporting Season Monitor February 2016

Feature Stories | Mar 09 2016

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

Download related file: FNArena-Reporting-Season-Monitor-02-16

This article was first published for subscribers on March 3 and is now open for general readership.

With the February result season now complete in 2016, the FNArena Result Season Monitor, which has been building throughout the month, is now complete and published here in its final form (see attached Excel file).

The table contains ratings and consensus target price changes along with brief summaries of the collective responses from FNArena database brokers for each individual corporate result, and an assessment of “beats” and “misses”. Australian corporate results tend to focus on the profit line, with all its inherent potential for accounting vagaries, tax changes, asset write-downs and other “one-off” impacts. FNArena has focused mostly on underlying earnings results (more in line with Wall Street practice) as a more valuable indicator of whether or not a company has outperformed or underperformed broker expectations. There is also a level of “quality” assessment here rather than simple blind “quantity”.

The Monitor summarises results from 317 major listed companies. By FNArena’s assessment, 118 companies beat expectations and 68 missed expectations, for a percentage ratio of 1.7 beats to misses. The simple average of all resultant target price changes came in at a net 1.44% gain. In response to results, brokers made 70 ratings upgrades and 70 ratings downgrades.

To put that into perspective, the previous August 2015 reporting season featured a ratio of 1.5 beats to misses for a 1.2% target price gain, and a ratio of 3 to 1 upgrades to downgrades.

A year ago, the February 2015 reporting season featured 1.1 beats to misses for a 5.6% target price gain. In that season, the ratio of downgrades to upgrades was 3 to 1.

We recall that in February a year ago, the ASX200 was on its way to an April peak of 6000 driven mostly by a global thirst for yield. Analysts were making calls of “overvalued”, hence the extent of downgrades. During August last year, the index had crashed back down to 5000, mostly thanks to China. Analysts were calling “oversold”, hence the extent of upgrades to downgrades.

We’ve been up and down in the meantime but we’re still basically stuck at 5000. Indeed, on January 31 this year the index closed at 5005. On February 29 it closed at 4880, but within a couple of days we’re back over 5000. There is no surprise, therefore, that this time around the upgrade/downgrade ratio was even.

The beats to misses ratio has nevertheless improved from 1.1 a year ago to 1.5 six months ago and 1.7 this season just past. It should be noted, however, that the average for beats to misses is never 1.0, as might be expected, but 1.5, or 60/40. Why? Because it is better to under-guide and over-deliver than it is to over-guide and under-deliver. Companies that miss tend to be sold down a lot more heavily compared to the rallies enjoyed by companies that beat. So inherent conservatism in guidance suggests a 60/40 beat/miss ratio from the outset.

While an even ratio of upgrades to downgrades this time suggests the market as a whole is fairly valued, perhaps the main feature of this result season is one of the winners continuing to be winners and the losers continuing to be losers. The latter camp obviously includes a lot of resource and resource-related companies. The former camp includes some reliable stalwarts, but also a lot of “new world” names. It’s been a long time since Australia “rode on the sheep’s back”. We have now likely also seen the end of an era that began early last century when one man was intrigued by a hill in far western New South Wales that appeared to be “broken”.

 [Note: This final table includes assessments for late reporters Catapult Group International ((CAT)) and Superloop ((SLC)).]

For further information on the relevance of this information, please see the Guide below.

New to this season's Monitor is a "Brokers Covering" column indicating how many of the FNArena database brokers cover each stock, ranging from one to eight. For easier appreciation, broker ratings Buy, Outperform, Overweight and Add are all collated as "Buy", Hold, Neutral and Equal-weight as "Hold", and Sell, Underperform, Underweight and Reduce as "Sell".

New to this season's Monitor is database broker Ord Minnett. Ords uses a five tier rating scale, as opposed to the standard three, of Buy, Accumulate, Hold, Lighten and Sell. To maintain consistency the Monitor will classify both Buy and Accumulate as "Buy" and Lighten and Sell as "Sell". However intra-tier up/downgrades will be noted.

To access the spreadsheet simply click on the attached document.

Guide:

Each day of the Australian six-monthly reporting season, FNArena provides a summary of broker responses to the previous day's profit result releases from companies under coverage. Readers are reminded that it matters not what actual profit/loss result is posted by each company but by how much that result exceeded/fell short of stock analysts' consensus forecasts. Stock price movements on the day of release, and in many cases for the months following the release, will often be determined by the extent of "beats" and "misses" of underlying earnings as well as company guidance and analyst/management outlook.

A rolling summary table (Excel) is attached to each day's report and will build as the season progresses. Additions are made each day, consistent with release dates, and stocks will then be listed in alphabetical order for ease of use until the full picture of the reporting season emerges.

Note that companies assessed include only those covered by the eight major stockbrokers in the FNArena database and that ratings changes and targets are those provided only by the database brokers.

Note also that "beat" and "miss" assessments are open to an element of subjectivity and not simply a result-versus-consensus-forecast comparison. Mitigating factors include one-off items, top line versus bottom line relevance, forward guidance as an important consideration and so forth. In many cases "profit" per se is not the most relevant performance indicator.

Australian corporate results tend to focus on the profit line, with all its inherent potential for accounting vagaries, tax changes, asset write-downs and other “one-off” impacts. FNArena has focused mostly on underlying earnings results (more in line with Wall Street practice) as a more valuable indicator of whether or not a company has outperformed or underperformed broker expectations. There is also a level of “quality” assessment here rather than simple blind “quantity”.

Disclaimer:

While FNArena's Reporting Season Monitor is being compiled with great care and our best endeavours, investors should note that we cannot guarantee that all data and information gathered and on display is 100% accurate at all times. FNArena does not accept any responsibility for errors and omissions that can occur. Investors should always do their own research and consult with a financial expert before making investment decisions. FNArena's Reporting Season Monitor is an informative tool, it does not not contain investment advice and should not be treated as such.

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