Feature Stories | Mar 10 2020
The February result season started out well but faded as the month progressed. Subsequent developments nevertheless ensure past earnings results now have little relevance.
-Largely weak season
-Broker upgrades misleading
-In the lap of the gods
By Greg Peel
With the February result season now complete in 2020, 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 314 major listed companies. By FNArena’s assessment, 97 companies beat expectations and 84 missed expectations, for a percentage ratio of 31/27 or 1.1 beats to misses. The simple average of all resultant target price changes came in at a net 1.04% gain. In aggregate, the total increase to all price targets combined amounted to 3.9%.
In response to results, brokers made 72 ratings upgrades and 48 ratings downgrades, or a ratio of 1.5 to 1 upgrades to downgrades.
The first FNArena Corporate Result Monitor was published in the August season of 2013. See table:
All in the Timing
Before we compare February 2020 to results seasons past, the number that stands out in the table above is -8.2% fall in the ASX200 from January 31 to February 28. It’s not the biggest market move in a season – August 2015 saw -8.6% -- but what is important in the context is that up to February 20 the index had risen 2% before falling -10% in the last week of the month.
Up until February 20 the world was unperturbed about the coronavirus outbreak in China, believing it would bring merely a blip in global growth and would all be over rather swiftly, at which point things would quickly go back to business as usual. With that in mind local investors concentrated on largely net positive earnings results up to that point, and pushed the ASX200 to a new record intraday high. It was a reported step-jump in Chinese virus cases that triggered the subsequent correction – a correction which on March 9 hit -19.5% from that intraday high.
Thus we might say the February 2020 result season was “a game played in two halves” in terms of macro sentiment – the first three weeks on the one hand and the last week on the other. How the market responded, and how brokers responded, to earnings results, changed significantly.
In short, the result season, outlining earnings performance in the six months to December 31, has become somewhat redundant. It is important to note that while disappointing forward guidance can, by FNArena’s analysis, constitute a “miss” of forecasts, in this instance guidance downgrades pertaining to the virus were not considered as such for this season, given the impact will be all in the six months to June 30. In December, the only “macro” influence on downgrades were the bushfires, and even they hit their peak in January.
Many a company reporting in that final week, as opposed to those reporting in the three weeks prior, either downgraded forward guidance due to the virus or simply withdrew guidance altogether given the uncertainty. Those managements that did deign to provide numerical assumptions all added a caveat of non-conviction, or if you like, “we really just don’t know”.