Feature Stories | Sep 08 2021
Download related file: FNArena-Reporting-Season-Monitor-August-2021
After a blow-away February result season this year, the August result season proved to be only average, and still we’re at covid’s mercy
-Only average beats to misses this season
-Ongoing demand meeting constrained supply
-Guidance remains shrouded in uncertainty
By Greg Peel
With the August 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 here.
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 346 major listed companies. By FNArena’s assessment, 117 companies beat expectations and 75 missed expectations, for a percentage ratio of 34/22 or 1.5 beats to misses. The aggregate of all resultant target price changes came in at a net 4.6% gain. In response to results, brokers made 50 ratings upgrades and 70 ratings downgrades.
The first FNArena Corporate Result Monitor was published in the August season of 2013. See table:
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Back to Average
Six months ago, the February result season proved to be the “best ever” in terms of company results beating analyst expectations compared to those missing. The beat-to-miss ratio came in at 3.7, compared to a previous high 1.9 in August 2020 and a seven-and-a-half year average of 1.5.
From end-February to end-August 2021, the ASX200 rallied 13%. From end-August 2020, the rally was 24%. On the strength of those moves, it appeared another strong results season may be in the offing.
The August result season 2021 proved to be rather average, on an eight-year timeframe. A ratio of 1.5 beats to misses is exactly average. The number of “in line” results of 45% compares to an average 44%.
The number of resultant broker ratings upgrades of 50 fell short of the 60 average, but downgrades of 70 compares to 71. When a market has rallied 24% in a year, it is of no surprise downgrades would exceed upgrades. Not so much on poor performances, although these were abundantly evident, but on runaway share prices that were too stretched, even if performance was stellar.
One notable element this season was the extent to which share prices moved up or down on the day of results release. Particularly in the fourth and by far busiest week of the season. I would put this down, to an extent, to computers, which these days drive elevated volatility. But I suggest that’s not the only reason.
The Four Horsemen
No, not of the Apocalypse, but of whatever the opposite of an apocalypse is. Six months ago I put what seemed by the numbers to be the ‘best ever” result season down to four factors, which rather undermined a call of “best ever”.
Firstly, lack of company guidance due to covid uncertainty. Once the initial national lockdown ended mid-last year, companies did begin to retest the guidance waters. But by August Victoria was back in its long lockdown, hence guidance was either again withdrawn or at least had a big caveat of ongoing covid uncertainty attached.
Without any guidance, analysts were fumbling in the dark to offer forecasts, and as such forecasts were conservative, opening them up to be beaten.
Secondly, JobKeeper. Analysts weren’t to know just what level of government handout companies enjoyed.
Thirdly, analysts were overwhelmed by the level of cost-cutting and earnings efficiencies companies were able to achieve in the face of covid.
Finally, the online boom. While online retail was always going to be boosted by lockdowns, analysts were caught out by the sheer explosion – not just in the things we had already been buying online, but in electronic goods and furniture and 4WDs and a lot of things not typically of the online domain, and in astonishing numbers.
Six Months On
Moving to the August season just passed, and only one of those four factors has undeniably changed: there’s no more JobKeeper.
Otherwise, companies have continued to cut costs and streamline their businesses by, for example, reducing bricks & mortar footprints and beefing up online services, but also via many other means. And online sales have continued to surge – if not at the explosive pace of the second half 2020, still at a solid clip. Analysts had understandably assumed that initial surge would quickly ease off on reopening, but in most cases, it’s been not by much.
The other lingering factor is guidance.
In February 2020, almost every company refrained from offering, or withdrew, guidance, and also cut, withheld or abandoned dividends. By August 2020 guidance was tentatively being provided, but with the covid uncertainty caveat, given Victoria was back in lockdown. Dividends had started to return.
Just when we thought it was safe, by late June this year, back we went into lockdowns. Thus again we have seen guidance either withdrawn altogether or with that ongoing caveat. Many of the “misses” notched up this August, or at least many of the big sell-offs on the day, can be attributed to either withdrawn guidance or disappointing guidance.
In the case of guidance disappointment, one pervading factor has been shortages of the supply of goods and materials, largely driven by delta issues across the globe, as well as labour shortages at home, exacerbated by state border closures. These have resulted in soaring costs, from finished goods to commodities and most notably freight costs.
But dividends? Well, we need only look to the iron ore miners, and other miners, and oil & gas companies, and even the banks, as well as many other industries. Take the money and run, as such numbers will not happen again in a hurry.
Looking Forward
One year on from the August 2020 season, which reflected the January-June period of covid uncertainty and lockdowns, we’ve learned a lot.
If nothing else, we’ve learned that the economy will swiftly rebound out of lockdowns, implying earnings forecasts need only be pushed out, rather than slashed.
But we’ve also learned that while lockdowns domestically are an economic pothole, we are very much beholden to lockdowns and restrictions across the globe, which have led to supply shortages and a significant spike in inflation – transitory, of course, but here for some time yet.
We have also learned, in Australia at least, that covid eradication is a pipedream. At least it’s a pipedream if we ever want to get the economy back on its feet. The target now is herd immunity, driven by vaccinations. The first vaccines were announced in November last year. In Australia, sufficient supply is only now arriving.
Economists have already started to wind back their 2021 GDP forecasts, and brokers have now started to wind back their December half earnings growth forecasts, although at this point, it has become a very wide spread.
Which only serves yet again to underscore uncertainty. We are yet to overcome that issue.
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The final Monitor for the August 2021 corporate results season is attached (see top of story). Paying subscribers have access to an archive covering all seasons from August 2013 onwards, via https://www.fnarena.com/index.php/reporting_season/
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