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August 2022 Result Season: The Wrap

Feature Stories | Sep 08 2022

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Download related file: FNArena-Reporting-Season-Monitor-August-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
-Peak dividends?
-Slowdown ahead

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).

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 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.

Same Dog, Different Lamp Post

Back in February (noting results reflected the half to end-December), results were heavily impacted by what was the overlaying theme of the season – supply constraints, rising costs, covid lockdowns during the delta wave and closed state and federal borders, with WA’s lingering border lockdown proving particularly impactful on the mining and energy sectors.

But in the half to end-June, lockdowns were being lifted, borders were reopening, and consensus suggested supply constraints would begin to ease, labour shortages would fade, and inflation would begin to subside. Managements were able to take a more optimistic view of the half ahead.

But no. Omicron appeared, shifting the labour shortage issue to one of covid absenteeism rather than covid lockdowns, as workers succumbed to the virus and had to isolate for seven days.

Any meaningful easing of supply constraints was scuppered by China going back in widespread lockdowns.

Any meaningful easing of inflation pressures was scuppered by Russia invading Ukraine.

And to top it all off, Australia suffered devastating, and repeated, flooding, as the east coast in general copped greater than average rainfall.

By August, when most companies issued fresh guidance, not much had changed. Omicron is at best subsiding and isolation has now been lowered to five days from seven, and “living with covid” policies should ensure no more lockdowns.

The same can’t be said for China, which is still implementing rolling lockdowns across major cities, impacting again on supply chains but also on demand for Australian goods.

The war goes on, with no end in sight.

And with La Nina forecast to hang around, another wet summer is in store for Australia.

Back when covid hit in 2020, very few companies deigned to issue any guidance, as we were simply not in Kansas anymore. In the ensuing period, guidance began to reappear but always with the caveat of covid uncertainty. Conservatism was required.

The mood was little different in this August season. While most companies issued some guidance, there were still those which refrained altogether. In many cases analysts deemed guidance to again be conservative.

But analysts are also decrying the uncertainty of the road ahead.

Dividends

If the August season will be remembered for anything, it will be the quantum of dividend handouts. Dividends have taken a while to return to more familiar payout levels since being scrapped in 2020 when covid hit, but for some companies the handouts were above all expectation.

And yes, they were all miners or energy companies. Standout payouts were forthcoming from the likes of BHP Group ((BHP)) and Woodside Energy ((WDS)). Others were a little weaker than hoped, with the likes of Rio Tinto ((RIO)) and Whitehaven Coal ((WHC)) for example, playing it cautiously, but even then the actual numbers were significant.

It was all about cash flow generation, which in turn was all about commodity prices, which shot up on the fallout from the war.

With the exception of LNG prices, and thermal coal, commodity prices have since subsided. Chinese lockdowns have been one reason, but even soft commodity prices (eg grains) have pulled back substantially from their blow-off highs.

Hence, analyst consensus is a case of enjoy it while you can, because we probably won’t see such high payouts from here on – positive still, but not extraordinary.

Resource companies are also now turning their attention to funnelling their cash flows into growth, with the obvious example being Woodside’s extensive FY23 capital expenditure plans.

Across other industries, August dividends equally beat or missed, and again the issue was one of uncertainty.

Inventories

Inventories were already a story back in February due to ongoing supply chain issues brought on by delta lockdowns. They became more of a story mid the June half, when US Target shocked Wall Street, and the Australian market, by issuing a big profit warning due to unsold inventories.

In February the general analyst response to companies – mostly retailers – building their inventories to above average levels in order to get ahead of supply constraints was that the move was sensible. But it’s only sensible if demand remained strong, and thus companies retained pricing power.

It is not sensible if you loaded up on the wrong goods, as US Target discovered. Target found itself left with too much of the stuff everyone bought during lockdowns, and didn’t need to buy again when lockdowns ended. Hence they’ve had to resort to discounting.

Similar issues have been faced in Australia. Too-high inventories of particularly discretionary items, such as apparel, furniture and electronics, were not treated well by the market in result responses. Indeed, inventory levels themselves were in some cases enough to trigger stock price weakness, irrespective of the actual earnings result.

Responses were not consistent across the sector. The automotive sector, for example, fared very well this season. Inflated prices for used cars and long delays for new vehicles, leading to order backlogs, suggest these companies can continue to succeed even in an economic slowdown.

One "retailer" who one would assume would suffer from high inventory levels, but didn’t, was Breville Group ((BRG)). Breville’s growing global footprint and supportive demand for its products provides the company with a buffer against slowdown, as well as pricing power.

Elsewhere among retailers, the story was mixed.

The Outlook

The outlook is arguably little different than it has been ever since covid hit. And then there are other extenuating circumstances that have reared in the meantime.

Hopefully we are seeing covid subside, but there remains the risk of yet another new variant appearing.

Either way, China’s stubborn zero-covid policy ensures city-wide lockdowns remain on the cards for the foreseeable future.

There is no end in sight to the war, and complete uncertainty over what Putin’s next move might be.

Inflation may start coming down in the US, but Australia is forecast yet to have seen the peak, and inflation in Europe is only moving further into the double-digits.

Central banks will continue on their rate hike missions.

In Australia, the housing market has only just begun to roll over.

There is little doubt Europe will suffer a recession, and likely a deep one, amidst energy shortages over winter, ongoing sky-high inflation and subsequent rate hikes. Most in the US assume a recession next year, but most likely only a shallow one. Beijing will do everything it can to avoid a Chinese recession, but ongoing lockdowns and a still-problematic property sector will at the very least ensure slow growth.

In Australia, an economic slowdown is seen as unavoidable as consumer demand falls on rate hikes, lingering inflation, falling house prices and ongoing weather disruptions. This week’s June quarter GDP result was boosted by consumer spending on all those things we couldn’t do during lockdowns and border closures, and that excitement will quickly fade.

That leaves commodity prices to prop up the economy, and they could go anywhere.

It is difficult to see, at this stage, just what might prevent a slowing in corporate earnings and an improvement in market sentiment. Unless maybe the war ends, inflation begins to plummet, central banks pause and/or Beijing drops zero-covid.

Wishful thinking.

On the other hand, China might invade Taiwan.

As to whether such doom and gloom has been sufficiently priced into stock markets is a point of contention.

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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