Feature Stories | Sep 16 2019
Download related file: FNArena-Corporate-Results-Monitor-August-2019
This article was first published for subscribers on September 9 and is now open for general readership.
The February result season was one of the worst on record. The August result season actually was the worst on record.
-Misses exceed beats from Australia's corporate results
-In-line results misguiding
-Outlook dominated by uncertainty
By Greg Peel
With the August result season now complete in 2019, the FNArena Corporate Result Monitor, which has been building throughout the month, is now complete and published in its final form (see attachment).
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 316 major listed companies. By FNArena’s assessment, 77 companies beat expectations and 80 missed expectations, for a percentage ratio of 24/25 or 0.96 beats to misses. The simple average of all resultant target price changes came in at a net 2.5% gain. In response to results, brokers made 65 ratings upgrades and 72 ratings downgrades, or a ratio of 1.1 to 1 downgrades to upgrades.
The first FNArena Corporate Result Monitor was published in the August season of 2013. See table:
Over the month of August, the ASX200 fell -3.1% which is not pretty, but also belies the fact the end result was net of some very elevated volatility throughout the month, in line with global macro developments. Hence specific share price responses on the day of result release have to be assessed in the context of was the index crashing on the day or was it surging, or just treading water.
Either way a beat is a beat and a miss is a miss, regardless of which way the share price moves. And that’s where the picture painted by this August season darkens.
Let’s start with the more benign stuff.
In response to results, brokers implemented 65 ratings upgrades against a running season average of 61 and 72 downgrades against an average of 77. Nothing particularly remarkable there. The ratio of downgrades to upgrades of 1.1 is close to average.
We can roughly divide ratings downgrades into two types – “bad” and “too good”. If a downgrade is the result of a broker’s view souring in response to a result, that’s “bad”. But if a broker downgrades simply because the share price had already run up too far ahead of the release, or too far on the day of the release, we can call that “too good” , which is a lot different to “bad”.
Similarly, ratings upgrades often reflect what brokers perceive as a too-harsh punishment of a share price following a “miss” of forecasts.
Brokers increased their net target prices by 2.5% over the season. This is again a benign outcome given the average is 2.7% and realistically this would reflect little more than “valuation rollover”, which is when a broker signs off on the result for that half and adds another half to the back end of its forecast period – typically five years – and valuation mathematically increases.
We might also note nonetheless that brokers took the opportunity this season to lower their “risk free rate” assumptions in line with plunging bond yields. This is the rate at which future earnings forecasts are discounted into today’s dollars. The lower the rate, the higher today’s dollar values.
That’s where the “benign” assessment ends.
Let’s start by noting the February result season this year produced the highest number of forecast misses on record – 33% to an average 24.5%. Also consider my commentary at the time:
“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. And ahead of this season, there were a lot of profit warnings issued.”
This August season saw that miss percentage shrink to 25% against an average 24.5%, so we might call that an average sort of outcome. Except that the “in line” count came in at 50% against an average 44.3%.
See above. Indeed, I’d wager there were even more profit warnings heading into this season than there were in February. The trend to hang out the dirty laundry before the market becomes more bloodthirsty during result season only continues to grow. Hence the “in line” percentage becomes less and less informative.
One of the most common assessments of individual company results this season was “in line with recently downgraded guidance”.
To that end, we should assess in terms of “beats” and “not beats”, for a large percentage of “in lines” were realistically “misses” by any other name. This season saw 24% of companies beat forecasts against an average of 31.1%.
Not only was it the lowest percentage of beats recorded since FNArena began the Monitor, it is the first time the beat percentage has fallen below the miss percentage.
This pretty much makes the August 2019 season the worst on record.
On Sunday last, tariffs were placed on new tranches of Chinese exports to the US and on US exports to China. As it stands currently, another tranche of Chinese exports will be hit by tariffs in December and if there remains no resolution in the trade war, the tariff level will rise to 25% from 15%.
What China will do is anyone’s guess.
The UK is headed for a general election that could make Boris Johnson the shortest serving prime minister in British history. He only holds his own seat by the slimmest of margins. Love him or loathe him, if he were to be returned, implying Brexit can go ahead, it might be a “no deal” economic disaster, but at least the damned thing would be over.
If he’s ousted, we could be in for another round of the Hundred Years War.
Australia’s economy grew by 0.5% in the June quarter, up 1.4% year on year – the slowest pace since the GFC. While not as bad as some forecasters had feared, the GDP result has to be taken in the context of iron ore prices up in the heavens during the quarter and back down quite a way since.
From here a lot will depend on whether Morrison’s tax cuts can stem the “consumer recession”, and whether a rebound in house prices can restore confidence.
The RBA is still expected to cut again in October. As to whether this will have any impact even the RBA is unsure. The labour market is the central bank’s key focus, and there the signs are weakening, not improving.
Not a great outlook really, but were we to see a deal on trade…
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