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February 2020 Result Season: The Wrap

Feature Stories | Mar 10 2020

Download related file: FNArena-Reporting-Season-Monitor-Feb-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).

Guide

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”.

Many a company reporting in the three weeks prior have since issued virus-related warnings as well.

In terms of results to December 31, pre-virus impact, we can consider February 2020 as weak. While 31% of beats is smack on average, 27% of misses exceeds an average of 24.7%. The beat/miss ratio of 1.1 to one is short of an average 1.3.

A percentage of 42% in-line results is slightly below an average of 44%, but as has increasingly become the case many of those “in line” results were in line only with previously downgraded guidance. In reality, misses were more extensive than the numbers suggest.

On the other hand, a ratio of 1.5 to one broker upgrades to downgrades well exceeds the average of 0.7 to one downgrades to upgrades. However, this number is misleading in the context of the period ending December. Many of those broker upgrades occurring in the final week (and in some case first three weeks) reflected a belief investors had overly panicked in selling down the stock, and the reason for that panic was the virus, which we are trying to isolate in this assessment.

Such upgrades are thus misleading, and we might suggest, given the market continues to plummet, unfortunate, although as late as last week broker upgrades were still well exceeding downgrades.

Outlook

No idea.

Nor does anyone else have any idea.

What we do know is central banks have begun to respond monetarily and governments have been or are set to make fiscal injections into the economy. As to whether this will make the difference, they don’t know either. This is not the GFC. A credit crunch can be, and was, brought to heel by massive stimulus. But stimulus will not stop a virus.

As noted, brokers continue to issue far more ratings upgrades than downgrades on the basis of the market having become overly panicked, but panic is just how these things work. That’s why there’s no toilet paper on supermarket shelves. Monday saw biggest single day’s fall for the ASX200 since the correction began.

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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