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Beware companies issuing multiple downgrades

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Beware companies issuing multiple downgrades

Over the last few months, eight times as many ASX-listed companies have downgraded as upgraded. That’s an alarming figure, and reveals a serious decline in business conditions. The mission for all investors is to try to avoid companies issuing further downgrades.

Back in mid-February, waste collection and recycling business Bingo Industries announced its 2019 profits would be broadly in line with the previous year.  The announcement represented a downgrade to its previous guidance for a 15-20 per cent increase in profits and it attributed the revision to a faster than anticipated softening in multi-dwelling residential construction activity, the absence of a price rise and a delay to the reopening of its Mortdale recycling facility.  The share price fell 50 per cent the day the company downgraded guidance.

The decline in residential construction activity is well entrenched, and it’s accelerating as it catches up to a 40 per cent plunge in building approvals earlier this year.  So, there is a real risk, all things being equal, that the trends that caused Bingo to downgrade in February, deteriorate further forcing Bingo to downgrade its 2020 numbers.

Costa Group is another company that downgraded earlier this year and our Senior Analyst Joseph Kim wrote about it here.

And manchester and homewares retailer Adairs share price fell 22 per cent on Friday 21 June, as the business succumbed to the slump in construction and sale of new homes, announcing like-for-like sales growth since 27 May has been flat and well below the nine per cent growth delivered in the second half of the year up to 27 May.

A quick review of companies that upgraded and downgraded in the last few months by our friends at stockbroker Morgans reveals a disturbing trend; eight times as many companies have downgraded as upgraded.

Figure 1. Sobering List

UPGRADES DOWNGRADES DOWNGRADES DOWNGRADES
ALL (May) ABC (May)  DHG (April)  NUF (April)
AMS (May) ACF (May)  FLT (April)  PDL (May)
GBT (June) AHG (May)  GNC (May)  REG (June)
REA (May) APE (May)  IPL (May)  RWC (May)
ATL (May)  KPG (May)  SGH (June)
BLX (April)  LNK (June)  SWM (May)
BWX (May)  MAI (May)  TRS (May)
CGC (May)  MQG (May)  VAH (May)
CGF (June)  MTO (May)  WES (June)
CPU (May)  MYX (May)  WGN (April)
CTX (June) NTD (May)

Source: Morgans

The list reveals far more companies are experiencing an adverse adjustment to their trajectories than those that are experiencing an improvement.  It at least partly explains why the RBA has shifted its policy settings towards more cuts.

The list is also useful for investors as it not only reveals a deterioration in conditions for a variety of sectors but it can also provide a source of companies investors might think about avoiding.  If the conditions that caused a particular company to downgrade have deteriorated further, there is the possibility that a particular company could be a repeat offender.

Take a look at the list of domestic companies above and ask yourself if their sector is still cycling through tough conditions.  Then ask whether the company has done enough with its 2020 guidance to reflect the real world.

A quick review of companies that upgraded and downgraded in the last few months by our friends at stockbroker Morgans reveals a disturbing trend. Click To Tweet
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Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. 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.

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Comments

  1. MICHAEL BARRETT
    :

    I think this list should be expanded and tracked over time. A valuable resource for any investor. I have a feeling that August is going to be a an interesting month for reporting and forward guidance.

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