Reporting Season: Reality Versus Sentiment

rudi-views
Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Mar 07 2019

In this week's Weekly Insights (published in two parts):

-Reporting Season: Reality Versus Sentiment
-Conviction Calls
-Aussie Banks & Market Sentiment
-Have Your Say
-No Weekly Insights Next Week
-Rudi On TV
-Rudi On Tour


[Non-highlighted parts will appear in Part Two on Friday]

By Rudi Filapek-Vandyck, Editor FNArena

Reporting Season: Reality Versus Sentiment

Corporate reporting seasons are important. They provide tangible indications about whether investor sentiment, assumptions and speculation are justified or misguided, but the release of corporate earnings reports never takes place in a vacuum. There are always other factors equally in play, be they macro-economics or geopolitical, or otherwise.

This year, the February reporting season took place against a background of a heavy, four month-long sell-down on the back of slowing growth globally, followed by a swift recovery that took everybody by surprise. That swift recovery was supported by Fed officials reversing their policy outlook towards a more market supportive "neutral" stance, with market participants now anticipating more accommodative policy reversals from central banks across the globe, and expectations of a trade war truce/solution/agreement between the Trump administration in the US and China.

Other factors that equally played a decisive role in February include far from worst case scenarios recommendations in the Hayne report to fix malfeasance inside the sectors of banking, insurance and wealth management in Australia, significant disruption to the availability of seaborne iron ore due to more production problems experienced by Brazil's Vale, and changing dynamics in the local telecom industry as incumbents start preparing for 5G and market share hungry TPG Telecom decided to shelve its own mobile plans on the back of the Australian government banning Huawei equipment, but also intending to merge with Vodafone Australia.


As positive momentum simply begat more positive momentum, equity indices in Australia rose some 13% from the lows around Christmas time, with February adding circa 6% in total return, including the first round of dividend payments. At face value, one would be inclined to conclude everything is hunky dory in the land of falling house prices, collapsing construction of tiny apartments and declining car sales, but when it comes to actual corporate results releases, a different reality opens up.

****

On more than one statistic, February 2019 has been one of the worst corporate reporting seasons in Australia post the GFC years of 2008 and 2009. FNArena's statistics only reach as far back as August 2013, but never have we registered more than 27% in companies failing to meet expectations. In fact, 26%-27% has been a rather common statistic during these eleven reporting seasons, accounting for four of the them, and this expands to six (more than half) if we expand the range to 24%-27%.

This year, however, the tally stopped at 33.4%; well above anything recorded in prior years.

Now consider also that analysts had already been lowering forecasts since last year, and that many of February's "misses" were due to rising costs and a more subdued outlook, and it should be clear: corporate Australia is genuinely experiencing challenging conditions. On UBS's assessment, some 15% of companies upgraded their guidance, but 17% of companies guided towards a less profitable outlook.

The numbers released by quant analysts at Credit Suisse look a lot worse, with 16.9% of companies beating expectations, 36.2% missing expectations, and 46.9% reporting in-line. (Different sample & methodology, different results).

Equally unprecedented is the fact that FNArena's average price target adjustment for the season as a whole ended up flat (strictly taken the end result was -0.06%). This too occurred against a background of valuations and price targets already in decline since the prior year. Looking back at the series since mid-2013, average price target increases have ranged between +5.6% in February 2015 and +1.2% in August of that same year.

Never has our calculation for the 300+ companies reporting been flat, let alone slightly negative.


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