Feature Stories | Sep 08 2022
The August 2022 result season delivered mixed numbers, featuring only a slight weighting to earnings beats, far more ratings downgrades than upgrades and the biggest cut to price targets on record.
-August results delivered only just a beat for beats
-Constraints linger from February season
By Greg Peel
With the February result season now complete in 2022, the FNArena Corporate Result Monitor, which has been building throughout the month, is now complete and published in its final form here (see attached).
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 344 major listed companies covered by FNArena database brokers. By FNArena’s assessment, 106 companies beat expectations and 92 missed expectations, for a percentage ratio of 31/27 or 1.1 beats to misses. The aggregate of all resultant target price changes came in at a net -3.0% fall. In response to results, brokers made 33 ratings upgrades and 79 ratings downgrades.
The first FNArena Corporate Result Monitor was published in the August season of 2013. See table:
Macro versus Micro
At a net 0.1% gain, movement for the ASX200 over the result season month was one of the smallest on record. However the index rallied 2.4% from end-July to peak at 7114, before falling -1.8% by end-August. By August 19, only around a third of all companies covered and due to report had done so.
Wall Street had consolidated over this period after dropping back from its interim high. This allowed local investors to focus on results, and respond accordingly, without too much macro noise. Aside from support from commodity prices, the rally to the August peak was supported by net positive responses to results. While some companies posted surprisingly positive results, a theme of this season was positive responses to results that were not as bad as feared.
The macro mood nonetheless swung sharply in the latter half a of the month, triggered initially by a shockingly high German wholesale inflation number, and late in the month when Jerome Powell used Jackson Hole to berate the market for believing anything other than the Fed would continue to hike rates hard until signs of US inflation dropping back sustainably were evident.
Over this period actual result responses were harder to gauge given the weak macro overlay, but still some companies managed to buck the trend in down-days by surprising to the upside. Those surprising to the downside copped exacerbated punishment.
In the wash-up, beats only managed to outpace misses by a ratio of 1.1 – not the lowest on record but close to it, and below the average of 1.5. Only once in the history of FNArena’s Monitor (August 2019) have beats failed to exceed misses, largely because it is in a company’s interest to set guidance low and beat it, rather than the other way around, and in stock analysts’ interest to be conservative with forecasts, as being wrong to the downside is more easily forgiven than being wrong to the upside.
Two stats on the table otherwise stand out. One is the ratio of ratings upgrades to ratings downgrades from brokers post-result, which came in at -2.4% (33 upgrades to 79 downgrades). This number has only been lower in two past seasons.
More glaring was the net price target downgrade of -3.0% -- the highest downgrade on record.
As was the case in the February season this year, which saw a ratio of -2.4% (previously the highest), target cuts to a great extent were influenced by “multiple contraction”.
Suffice to say on a year-to-date basis, the ASX200 was down -8% to the end of August, and a similar amount from the April high. While part of that fall in price (P) can be attributed to reduced earnings (E) forecasts, it can also be attributed to negative sentiment impacting on the price-to-earnings ratio (PE), expressed as a multiple (eg 15x).
Hence, while stocks were being downgraded on lower expectations they were also being downgraded on lower general market or sector sentiment.
Then there’s the matter of guidance. By FNArena’s assessment, weak forward guidance provided by management can determine a “miss”, even if the result itself was an earnings beat.