The expectations and surprises of reporting season
In this week’s video insight, I delve into the highlights of the February reporting season and its unexpected outcomes, a key period for those of us monitoring the Australian equity market. Despite a challenging economic backdrop, a noteworthy number of companies have outperformed expectations, bolstering my optimistic view on the potential of quality, innovative companies. As the season concludes, I offer my insights on the unexpected turns and the bright prospects for equity investors, reaffirming my bullish stance for the future.
Transcript:
February is always a keenly awaited month for observers of the Australian equity market because it features reporting season.
In this biannual event, Australian listed corporates release their first-half profit numbers for the current financial year. It is usually viewed as an important signpost for equity investors – in large part because it often brings its fair share of surprises, both positive and negative.
About 80 per cent of companies have reported and are reporting results that occurred during a period in which gross domestic product (GDP) for the three months to September was softer than expected, with growth likely to remain around the 1.5 per cent annual growth rate.
As is typical during most reporting seasons, reporting season tends to commence with the better results. And that we are nearing reporting season’s conclusion, the good news is tailing off, and the proportion of companies beating expectations is doing likewise.
Despite that, more than a third of companies (about 36 per cent) have exceeded estimates, and another 37 per cent have met expectations. Just 27 per cent have missed. If I was to hazard a guess as to why the market is surprised, it is that there have indeed been positive surprises. Many analysts were bearish going into reporting season.
Consensus expectations are for aggregate profits to fall about five per cent this financial year. Importantly, however, the decline is largely a function of falls within energy sector companies on the back of lower oil, coal, and gas prices.
It’s easy to feel despondent, but don’t. Plenty of the high-quality companies we like to follow and which our managers own have exceeded expectations. Indeed, a majority of the Montgomery Small Companies Fund’s top ten companies have exceeded expectations, and some of them by a lot. Over in the U.S., Q4’s earnings season’s highlight was Nvidia (NASDAQ:NVDA) declaring an AI ‘tipping point’ as revenues surged by 265 per cent over last year and by 22 per cent on a sequential quarterly basis. The company’s $22.1 billion in revenue beat expectations of $20.6 billion by almost 10 per cent, and earnings per share of $4.93 per share easily beat expectations of $4.64.
Back to home soil, and the ‘beats’ have continued to exceed misses. 42 per cent of company results have come in above consensus earnings expectations, and 38 per cent have come in below. Most of the winners were in cyclicals, but it’s worth shouting out those companies such as Lovisa (ASX:LOV), Megaport (ASX:MP1) and Audinate (ASX:AD8) (all held in the Montgomery Small Companies Fund) that are growing thanks to an expanding global market.
Reporting season admittedly kicked off with the expectations bar set low, and this has helped many companies – particularly those in the consumer discretionary sector, such as JB Hi-Fi (ASX: JBH), Temple and Webster (ASX:TPW), Cettire (ASX:CTT), Lovisa (ASX:LOV) and Super Retail (ASX:SUL) – to surprise to the upside.
Price rises that have stuck, combined with cost-cutting, have resulted in margin improvements that have also beaten expectations. And this company news adds to the bullish narrative I have been sharing for over a year that a combination of disinflation and positive economic growth has provided support to innovative growers. Quality, innovative growers are the types of companies all our managers, from Gary and Dominic at Montgomery Lucent and Sean, Alan and Daniel at The Montgomery Fund and Montgomery [Private] Fund and Damon and his team at Polen Capital, all focus on.
For various reasons – which I will share in a future video – I believe that while there will be a few bumps along the way, equity markets will be a great place to generate returns through to 2026.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
