Rudi’s View: August Results; Anticipation & Trepidation

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Jul 29 2021

In this week's Weekly Insights:

-August Results: Anticipation & Trepidation
-Predicting The Next Index Changes
-Conviction Calls
-Research To Download
-FNArena Talks

By Rudi Filapek-Vandyck, Editor FNArena

August Results: Anticipation & Trepidation

Prima facie, Australian shareholders have plenty of reasons to feel excited ahead of the upcoming August results season.

Most companies have recovered more quickly than forecast from last year's lockdowns and pandemic, and profits and dividends are in a strong uptrend with Macquarie analysts observing consensus forecasts in Australia are now in their 11th consecutive month of upgrades, and expectations are building there's more of the same on the horizon.

February was on most market analysts' assessment one of the best local results seasons ever. Corporate Australia not only delivered strong recoveries in profits and dividends, but -uncharacteristically for Australia- it also handsomely beat analysts' forecasts, even though they had been lifting for multiple months already.

On FNArena data, the percentages of earnings "beats" over the past three reporting seasons (before, during and after February) have been at 49%, 47% and 55%, respectively; well above the circa 33% average we measured over the twenty seasons prior.

According to stockbroker Morgans, corporate Australia is currently experiencing one of its strongest upgrade cycles since late 2004. Over the past three months, upgrades have outnumbered downgrades by two-to-one with both miners and energy companies enjoying the strongest momentum.

Recent corporate market updates have equally contributed further, as did Cimic Group's ((CIM)) interim results release last week. It wasn't exactly a shoot-the-lights-out performance from the former Leighton Holdings, but it was good enough for slightly increased forecasts, a small bump up to analysts' valuations (already well above the share price) and the share price has risen slightly too.

For a company that hasn't exactly been kind to its shareholders over the past two years, it most have felt like a welcome relief for many, and a possible early indicator of the turnaround stories that August might present.

One minor disappointment, ironically, would have come from numerous mining companies not meeting production forecasts or failing to contain costs, including BHP Group and Rio Tinto, but the sector continues to enjoy stronger-than-expected prices for its products, which offers plenty of compensation, plus some.

When resources analysts put today's spot prices into their modeling, they see share prices trading on double digit percentages in free cash flow, which then feeds into questions such as: how high exactly might dividends be next year?, but also: how long before those share prices start pricing it in?

It is for this exact reason, I believe, that share prices have remained remarkably resilient over the weeks past, even as governments globally encountered set-backs in their quest to quell the pandemic, including 60% of Australians back in lockdown, and with the climate causing chaos and havoc in parts of Europe and Asia.

Corporate profits are recovering rapidly. Forecasts keep rising, while expectations for the years ahead remain positive. Dividends are coming back, and growing. There's potential for bonus payouts, for buybacks, and for M&A.

Only a few weeks out from August, it would take a lot of negative news to convince investors they'll be better off selling shares in, say, Fortescue Metals ((FMG)) and Mineral Resources ((MIN)), but equally in REA Group ((REA)), Telstra ((TLS)) and Charter Hall ((CHC)).

Clearly, it hasn't happened, and I'd wager this is because the same positive prospects are currently supporting optimism in Europe and the US, where corporate performances are equally surprising to the upside.

That said, there is always the possibility this positive undercurrent might turn or exhaust itself and investors will thus be on the lookout for clues both here and overseas: are business leaders confident enough? What are the effects of transitory inflation on profit margins? Is the consumer prepared to spend more from savings? Are governments able to navigate their way out of this? Did anyone mention central banks and less stimulus?

There is always the dreaded elephant behind the curtains: what will bond yields do in the months ahead?

Not to be dismissed: investors are reminded corporate performances are always judged against forecasts and expectations. While multiple signals point towards ongoing potential for positive surprises, it remains yet to be seen whether corporate Australia can maintain the exceptionally high percentages of "beats" we all have experienced post August last year.

I am inclined to think the numbers of "Beats" and "Misses" will look a lot more "normal" by the beginning of September and this by default means there is potential for a lot more portfolio damage even without macro-influences and left field occurrences.

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