Feature Stories | Mar 05 2021
Download related file: FNArena-Reporting-Season-Monitor-Feb-2021
The February result season saw the average beat-to-miss ratio of forecasts absolutely smashed. Does that make it the best season ever?
-Australia’s spending frenzy
-Ongoing government support and cost cutting
-Many companies still not game to offer guidance
By Greg Peel
With the February result season now complete in 2021, 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 347 major listed companies. By FNArena’s assessment, 164 companies beat expectations and 44 missed expectations, for a percentage ratio of 47/13 or 3.7 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 61 ratings upgrades and 43 ratings downgrades.
The first FNArena Corporate Result Monitor was published in the August season of 2013. See table:
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Astonishing Results
The record for FNArena’s beat/miss ratio in a season in the seven years of the Monitor’s existence had previously been 1.7, in February 2016. Last August’s season smashed that record with a ratio of 1.9, against the seven-year average of 1.5.
This February’s result season, that ratio hit 3.7.
But then we live in interesting times.
I suggested, last August, that the result of 1.9 was misleading under the circumstances – those circumstances being covid. I offered four reasons.
The primary reason was a complete, but totally understandable, lack of guidance from company managements. This left stock analysts fumbling in the dark, having to guess at a forecast. It makes sense that given the sheer uncertainty, an analyst would chose to be conservative and go in low, rather than seem foolish in going in high.
Another reason was, pure and simply, JobKeeper. Analysts could not know just what this earnings-saving number might be for each company. But also catching analysts out was the extent to which many companies were able to swiftly reduce costs to offset loss of revenue.
Then there was the online factor. Analysts certainly expected lockdowns would boost online sales, but were blown away by just how much. Clearly this was a boon for online-only retailers, but traditional retailers were not only swift in bolstering their online platforms, they were swift in implementing covid initiatives such as “click & collect” and no-contact delivery.
These four factors added up to a seemingly “stellar” result season, but when one notes ASX200 earnings fell a net -20% in the period, “stellar” is perhaps not the right word one might choose.
We then entered the July-December half with as good as zero RBA rates, ongoing fiscal support (eg JobKeeper) and lockdowns having ended.
Or so we thought.
Some, but not all companies, had been brave enough to provide fresh guidance with August results, but all with a caveat of “covid uncertainty”. Which was sensible, because Victoria soon went back into lockdown, for 111 days.
A lot of that guidance was then rapidly withdrawn, leaving analysts to a great extent back in the dark. But at least the lockdowns had revealed what trends were now established – stay-at-home, work-from-home, shop online, and save what you can.
Home is where the heart is
Savings did leap substantially once covid hit, and to this day remain elevated against the historical average, but what analysts didn’t see coming was a tidal wave of home-related spending.
We couldn’t travel overseas, and interstate borders were opening and shutting every other day. While some hospitality venues began to reopen, restrictions were still in place, such as no dancing, no singing, no standing less than 1.5m apart, and definitely, no fun.
It was a no-brainer that electronic goods would be required for work-from-home, and learn-from-home, and stuck-at-home, and that home cooking would thrive, but it was assumed once everyone had bought what they needed, that would be the end of that.
Nothing could have been further from the truth.
Australians exploded into a frenzy of spending the money they had saved and the money they would otherwise spend elsewhere in new fridges, new clothes (all casual), new sofas, new cushions to go with them… all the way to full-on renovations. They also tricked up the car, or bought a new one for intra-state road trips. Anything that might enliven their new covid worlds, they bought.
And still are. Something called BNPL appears to have become popular.
And then the iron ore price went up. And up. Way above broker forecasts. And copper took off, and coal recovered, and so did oil. While consumers were being awarded their black belts in shopping, out in the desert, miners couldn’t get the stuff out of the ground fast enough.
And still, companies were collecting JobKeeper. And then HomeBuilder came along. And still companies were cutting costs and improving efficiency.
Once again, analysts cannot be blamed for their foggy crystal balls. But the question now is: When will it end? This has been a feature of the February result season, and in many, many cases, from retailers to travel companies to miners and beyond, the difference between a Sell rating and a Buy rating on the same stock is the difference between analyst views of “soon” and “not yet”.
But none of the above takes away from the fact a beat/miss ratio of 3.7 is no less than astonishing in historical terms. Other metrics were nothing special. The number of “in-line” results was close enough to average. So too was a ratings upgrade/downgrade score of 61/43 nothing out of the box. And a 5% net target price increase, while above average, did not break any records.
So obviously the market must have soared over February!
Atlas Shrugged
No it didn’t. When the dust settled the ASX200 closed up just 1% for the month.
The problem is we can only judge the market response to earnings over the first two weeks of the season, when Wall Street went quiet and macro factors kept their distance. In the latter two weeks, macro reared its ugly head again and distorted the picture.
While the first two weeks were pretty sparse in terms of reporting companies, it did appear evident that all those “beats” were not much being rewarded. Often winners were sold off. Investors had built in a lot of expectation, and bear in mind the ASX200 had rallied 37% from the covid-low last March to the beginning of February. Sell the fact.
So 3.7? Yeah, whatever. We’re not out of the woods yet.
There’s a New World Somewhere
The fact we’re not out of the woods is underscored by a still-large proportion of companies not offering forward guidance with their results, even one year on from covid’s arrival. And still those braving guidance have attached the now ubiquitous caveat of covid-dependent.
We’re now almost halfway through the January-June half, and so far the trends seen from the prior half are holding up. On the horizon now is one big positive, and one big negative. Vaccines are being rolled out, and after this month, JobKeeper ends.
Death rates are coming down across the globe, but variants continue to concern. And we are yet to see how these vaccines really perform. That will only be known with time.
We now have an emerging inflation fear, driven by ongoing monetary stimulus and fiscal stimulus – in the latter case attention in Australia now turns to areas such as infrastructure spending rather than straight hand-outs. Recent bond yield spikes and subsequent stock market scares indicate investors are wary of where we’ve reached post the covid nadir and what might derail the rally from here.
A new world is slowly emerging, but we’re still not entirely sure what it will look like.
Technical limitations
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