Feature Stories | Sep 12 2018
Download related file: FNArena-Reporting-Season-Monitor-August-2018
This article was first published for subscribers on September 6 and is now open for general readership.
With reporting season now complete, we table the numbers and compare this season with those past.
-Low ratio of beats to misses
-Downgrades outnumber upgrades
-Overvaluation calls dominate
By Greg Peel
With the August result season now complete in 2018, the FNArena Result Season Monitor, which has been building throughout the month, is now complete and published in its final form (go to Reporting Season Monitor).
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 311 major listed companies. By FNArena’s assessment, 88 companies beat expectations and 76 missed expectations, for a percentage ratio of 28/24 or 1.2 beats to misses. The simple average of all resultant target price changes came in at a net 3.4% gain. In response to results, brokers made 45 ratings upgrades and 83 ratings downgrades, or a ratio of 1.8 to 1 downgrades to upgrades.
The first FNArena Reporting Season Monitor was published in the August season of 2013. See table:
During this August, the ASX200 rose 0.6%. It was by no means a smooth ride, punctuated at a global level by trade war fears, and overshadowed domestically by the ongoing banking Royal Commission. It was a similarly choppy ride for the Aussie dollar, which ultimately fell from around US$0.7450 to US$0.7180, providing a tailwind for Australia’s large multinationals (such as CSL).
Comparing the numbers to past seasons suggests this was a largely mediocre season, without being a shocker. A beat/miss ratio of 1.2 (actually 1.16) is below the average of 1.3 but not as low as the Augusts of 2017 and 2014.
It must be noted that while profit warnings are frequent ahead of any results season, profit upgrades in the lead-up are rare. Typically, companies like to get the bad news out there as soon as possible to temper the trashing they would receive if a big miss came as a shock. On the other hand, nobody minds a big beat. What the “miss” count does not show is how many companies reported “in line” with estimates that had earlier been downgraded following a profit warning.
It is for these reasons the beat/miss average is 1.3 and not 1.0 as a typical average might imply.
The table does not indicate the percentage of “in-line” results, but at 48%, it is at the high end of the spread since 2013. I was actually expecting this to be higher given what I noted, while compiling the result monitor, was a high number of results that matched “pre-released” numbers or “recently updated guidance”.
“Confession Session” – the period ahead of results season when companies who know they’re going to miss consensus forecasts issue profit warnings – has been with us since time immemorial. But there appears to be a growing trend of companies providing the market with a heads up as the season proper approaches, whether that be bad news or good. Pre-releases of headline numbers or unaudited accounts or updated guidance as late as within the month before seem to be becoming more popular.
This also ties in with the growing trend in Australia, at least among larger companies, to issue quarterly updates in between result seasons that are for all the world quarterly results, which suggests a shift towards the Wall Street’s four result seasons a year as US disclosure laws require.
Interestingly, there is push in the US to shift back to half-year or even full-year result requirements only, a suggestion championed by everyone one from JPMorgan’s Jamie Dimon to the president himself. Supporters argue quarterly disclosure and guidance updates force managements to be too short term-focused, working towards keeping Wall Street happy every three months rather than executing on a longer term vision without overbearing scrutiny.
The jury is out, but we might note that if the trend towards more frequent disclosure in Australia continues, results season might become a very dull affair.
While there were the usual range of train wrecks and upside shocks among reporting companies that kept mum in the lead-up, a lot of which were due to guidance rather than actual result, the standout sector performer this season was Information Technology, or as they say on Wall Street, “tech”. It is this sector that drew a lot of broker downgrades post-result for the simple reason of share prices flying to the moon and valuations, in broker’s eyes, becoming too rich.
IT represents only 3% of the market cap of the ASX200, beating only utilities (by a whisker). Financials represent 31% and materials 18%.
At a 1.8 ratio of downgrades to upgrades, this season is the worst since February 2015. But given the beat/miss ratio was positive, downgrades for overvaluation will have exceeded those brought about by too great a miss of forecasts.
For more insight see August 2018 Reporting Season: The Final Verdict.
We further note that consensus broker target prices increased by 3.4% over the month, above the 3.0% average. The combination of target price increased but rating downgraded was a common one this season, again supporting an “overvaluation” assessment.
However, it must be noted that since the table above began, net target prices have never gone down. One reason for this is what brokers call “valuation rollover”. While different valuation models are applied to different sectors and stocks, the discounted cash flow (DCF) model is the most prevalent. This model basically discounts a broker’s earnings forecasts “over the forecast period” (typically five years) by the prevailing real interest rate.
When a company reports its full year result, all outer year forecasts then shuffle forward and a new year is added. Inflation ensures the nominal value of money simply rises over time.
Whether or not we may judge the season as “mediocre, or maybe “okay”, it will still be a season in which the ASX200 posted a new post-GFC high. There’s only about another 500 points to go to reach the all the time of October 2007.
Wall Street passed that same mark in 2012 and has since doubled.
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