Rudi's View | Aug 15 2019
Dear time-poor reader: early update on corporate results, plus a longer-term assessment of CSL.
In this week's Weekly Insights:
-August Reporting Season: Early Progress Report
-CSL Challenge: The Key Ingredient
-Rudi On Tour
By Rudi Filapek-Vandyck, Editor FNArena
Question: what is a stock that has fallen by -90%?
Answer: that's a stock that falls by -80%, and then the share price halves.
August Reporting Season: Early Progress Report
August is local reporting season for Australian listed companies, but the pace of corporate results releases is so much skewed to the second half of the month that as half-way approaches on the calendar, it remains way too early to draw any definitive conclusions or make far-reaching assessments.
As at Monday, 12th August 2019, the FNArena Corporate Results Monitor still only contains 30 corporate updates. Considering that by month's end the total will have exceeded 300 updates, we have an urge to feel sorry for ourselves. After all, those 300 corporate releases will have to be covered, followed up, updated and summarised. And the slower the season ramps up... you get the idea.
A few early assessments won't go astray (we hope). Corporate Australia clearly is doing it tough. Corporate updates thus far either reveal declining profits, or negative sales growth, or downward pressure on margins, or all three combined.
Subsequent share price responses are often left to management's guidance for the year ahead, potentially supported or negated by hedge funds and other traders taking position prior to the results release.
As such we witnessed Suncorp ((SUN)) releasing a weak result, but with the share price moving higher, and on Friday REA Group ((REA)) missed market expectations, but its share price since put in a notable rally higher. In contrast, CommBank ((CBA)) shares were initially punished upon the release of a weak financial report card, but buyers have since shown themselves.
No such buyers' interest has revealed itself for Insurance Australia Group ((IAG)), whose shares are down quite heavily in a short time, including following the release of disappointing FY19 numbers, and the same observation can be made for Cimic Group ((CIM)), Janus Henderson ((JHG)) and GUD Holdings ((GUD)), whose share prices are all trading significantly below levels prior to the respective results releases.
In the lead-up to August, I predicted investors were most likely to witness a multi-layered experience. The first two weeks are already showing plenty of evidence for this thesis.
We also had a number of major beats, with subsequently solid share price rallies for James Hardie ((JHX)), Pinnacle Investment Management ((PNI)), and Navigator Global Investments ((NGI)). Both ResMed ((RMD)) and REA Group once again proved quality High PE stocks are not necessarily toast, as they have done for many years now.
Continuing on my forecast of a multi-layered August reporting season, Macquarie analysts note companies with direct exposure/leverage to the local housing market have all revealed "headwinds" and tough operational challenges, with each of James Hardie, REA Group, Transurban ((TCL)), CommBank, Mirvac ((MGR)) and Nick Scali ((NCK)) talking the same talk.
But not all housing related business models are similarly vulnerable or operationally exposed with James Hardie and REA Group arguably in a better position than CommBank and Nick Scali.
Macquarie, by the way, continues to recommend investors should buy the dip in selected housing-related businesses, including REA Group, Nine Entertainment ((NEC)), Stockland ((SGP)), James Hardie, CSR ((CSR)), National Australia Bank ((NAB)) and Westpac ((WBC)).
Macquarie's reasoning is that housing will stabilise and subsequently improve on the back of continued RBA rate cuts.
In continuation of recent years, reporting season these days is heavily coloured with capital management (special dividends and share buy backs), as well as with capital raisings. A-REITs in particular are once again using the opportunity to raise fresh capital, but Nufarm ((NUF)), Transurban and AMP ((AMP)) equally have announced fresh raisings.
In terms of general trends, FY19 average EPS growth might not come out too far off the zero mark, predominantly because of another booming performance from resources, in particular iron ore producers and gold miners.
Banks are expected to extend their negative growth period and international industrials are projected to perform significantly better than domestic industrials.
FNArena continues to provide daily updates on Australian corporate updates: https://www.fnarena.com/index.php/reporting_season/
The early data are far from encouraging with decisively more "misses" than "beats" (40% versus 30%) but, as every optimist will tell us, it remains early days.
"August Preview: Lower Rates & Lower Growth"
"Corporate Earnings Still Matter In 2019"