Feature Stories | Sep 09 2020
Download related file: FNArena_Reporting_Season_Monitor_August_2020
The August result season could be called “best ever” in terms of beats to misses, but in 2020, such a conclusion would be misinformed
-Guess and giggle forecasts
-Government support and cost cutting
-Uncertainty ongoing
By Greg Peel
With the August 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 here (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 318 major listed companies. By FNArena’s assessment, 114 companies beat expectations and 61 missed expectations, for a percentage ratio of 36/19 or 1.9 beats to misses. The aggregate of all resultant target price changes came in at a net 5.0% gain. In response to results, brokers made 54 ratings upgrades and 52 ratings downgrades, or an even enough ratio of upgrades to downgrades.
The attached PDF contains all this data and summaries of broker responses to every company reporting.
The first FNArena Corporate Result Monitor was published post the August season of 2013. See table:
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Into the Darkness
Late last year, the ASX200 finally surpassed its pre-GFC high. The achievement took twelve years. It had taken Wall Street five. The ASX200 continued to rally into blue sky as we moved into 2020, peaking on February 17.
At that stage we were three weeks into the February reporting season, and to that point the season was shaping up as very positive. We all know what happened next.
Almost all companies reporting in the last week of February declined to provide forward guidance as they had no clue what might ultimately transpire. Some cut, deferred or abandoned their dividends in order to preserve capital.
By the time the country went into lockdown, the rush was on among those companies which had reported before February 17 to withdraw the guidance they had provided, and in some cases put the dividends they had declared on hold.
The next step was a rush of companies raising fresh capital to cover debt and build a provision against a likely collapse in earnings.
Stock analysts were left with a dilemma. They were being paid to provide earnings forecasts. If managements had no idea, why would analysts know any better? But to earn their pay, they had to provide something.
All would ultimately be revealed in the August result season, following books close on June 30.
Record Beats
For what was shaping up to be the “worst” reporting season in anyone’s lifetime, it actually turned out to be the “best” (since the FNArena monitor began in August 2013) in terms of the ratio of results beating analyst forecasts to those missing. That ratio of 1.9 smashed the average of 1.3, and surpassed the previous high of 1.7 in February 2016.
But to call it the “best” would be disingenuous.
For starters, ASX200 earnings fell -20% in the half to June. That is your “worst” result right there, but the Monitor’s job is to compare actual numbers to forecast numbers.
More importantly, we come back to the aforementioned analyst dilemma.
Analysts themselves for the most part admitted, in updating their forecasts for companies post February, that really they were just guessing, even if they didn’t put it quite so candidly. Those guesses, as it turned out, were typically conservative, for no one would blame the analyst for fearing the worst and then being proven overly fearful, but the analyst who proved too optimistic under the circumstances would look a fool.
On that basis, upside (to very low forecasts) was always a likelihood even before the season began.
We then note that the stock market bounced hard off its lows in April, having been declared “oversold”, and then continued to rally as lockdown restrictions were eased and the economy gradually “re-opened” as we moved towards June. For managements, the clouds began to part, providing an opportunity to provide fresh guidance, and after June books close, to pre-release actual headline results.
Every season sees such pre-season activity and indeed this August season saw an average number of “in line” results. Earnings forecast and ratings upgrades/downgrades were made by analysts before the season proper, hence we may have yet had more beats to misses than the final “best ever” ratio suggests.
But why so many beats?
I’ll offer four reasons: (1) the aforementioned preference by analysts to go in low and be beaten rather than go in high and be missed; (2) JobKeeper; and (3) an impressive rush by managements to cut costs; and (4) where applicable, extraordinary gains in online activity.
Many companies were JobKeeper recipients and while this rather distorts profit lines, given it’s a one-off government handout, it did save the bacon for a lot of companies, particularly those with high debt levels.
In many cases, a “beat” of analyst forecasts was largely attributable to cost-cutting efforts which were above and beyond what analysts thought possible. Of course there are two “types” of cost-cutting – the cuts that streamline a business and lead to greater earnings efficiency, and the cuts implemented in desperation to prevent a company’s demise.
Both were in evidence, but if we add in aforementioned capital raisings we can conclude that to some extent “beats” were a matter of simply remaining commercially viable.
As for online activity, it was no surprise to anyone online sales would dominate in the lockdowns, but what was a surprise was just how much of a surge there was. Companies that existed only online were obvious beneficiaries, companies complementing in-store retail with established online retail also fared very well, and even some companies which up to now had been slow online movers managed to rectify the situation with haste.
All of the above can in varying amounts explain why the worst earnings performance since the GFC led to the “best” earnings season on a comparative forecast-to-actual result basis.
But I’ll also throw in the fifth factor.
The bulk of companies beating forecasts — and note the Monitor covers 318 stocks covered by FNArena database brokers, not just 200 — were small cap companies. Many of those small companies are only reviewed by analysts after each result season, meaning once every six months.
The Outlook
It was assumed from the outset the half to June would be a shocker, in terms of absolute earnings results and overall economic performance. The August result season, and the more recent June quarter GDP release, confirmed both. But it was also assumed the half to December would be one of recovery, even, perhaps, record GDP growth off a very low base.
To that end, analysts were looking forward to companies providing forward guidance with their August results, making life a bit easier.
But along came Victoria. First came the spike, then came the re-lockdown, then came the lockdown extension. The first two steps led many a company to yet again refrain from providing guidance, and others to provide guidance but with a big Victoria uncertainty caveat. The extension may yet bring more reviews and possible withdrawals.
So here we go again.
Another notable aspect of this reporting season in particular is the growing number of analyst views and subsequent recommendations based on a “look through” to subsequent years in which one assumes a vaccine has been found and life will slowly return to something like normal.
Analysts set price targets for twelve months hence, but many a rating this season has been based on assumptions for FY22, FY23, and even FY24, and thus an emphasis on longer term value.
Of course “normal”, if we ever get there, will be a “new normal”. Online services have been growing for a decade but we have since seen a rapid acceleration to levels analysts believe will not ease back in the future, but grow. Indeed anything to do with the internet has a bright future, while legacy industries will need to adapt lest they fade away.
Not everything can go online. Miners will always need to dig rocks out of the ground for example, but then already we see Tonka trucks that drive themselves and processing systems run more efficiently using cloud-based software.
And that’s just one example.
The future’s so bright, I have to wear shades. If only we knew when the future will be.
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