GUD kicks off reporting season weirdness
With reporting season kicking off in Australia, we expect the disparity between earnings expectations and results to be the widest in memory. As an example, pump and filter manufacturing company GUD Holdings Limited has stated the demand environment is simply too dynamic to be able to provide guidance.
Our primary thesis for The Montgomery Fund and The Montgomery [Private] Fund is we are in unchartered waters. Equities appear to have completely decoupled from earnings. Usually material falls in earnings per share (EPS) forecasts corresponds with a fall in equity markets of a similar magnitude and sometimes even more. Although not in 2020.
You might also usually expect a material rally in stocks to be a reflection of accelerating economic growth and therefore be accompanied by rising bond yields. Not in 2020. In the 2020 financial year the Australian government collected $9.2 billion less personal income tax and it will collect $26.9 billion less in the 2021 financial year. This on top of the additional economic support including JobKeeper and JobSeeker which will ensure net government debt, which was expected to be close to zero last financial year (0.4 per cent of GDP), will instead balloon to 24.6 per cent of GDP, and then 35.7 per cent in the 2021 financial year.
In any material rally we would also expect growth stocks and value stocks to rise in concert. Not in 2020. Instead, the MSCI Global Growth Index is at new all-time highs while the Value Index is well below.
We are not in normal times. We are in a health crisis and an economic crisis. Fortunately, at this juncture, we are not in a financial crisis.
Finally, we expect the disparity between earnings expectations and actual results to be the widest in memory.
The shock of a hard stop on economic activity and its impact on business models, will mean earnings are bound to be adversely impacted. There will be companies that surprise on both the upside and the downside but ‘surprises’ will be the feature of this reporting season.
Of course, it is not only the dynamic demand picture’s impact on revenue that analysts and investors must contend with; there’s the changing competitive landscape from a tidal wave of bankruptcies to factor into assumptions, as well as the impact of lease reductions and rental holidays, JobKeeper and the phased rollout of a range of new grant and loan programs under the JobMaker program that will impact the cost line for businesses.
Publishing a forecast for FY20 or FY21 will be challenging, and any company willing to provide analysts with guidance should be considered courageous.
GUD FY21 results comments
GUD this week, reported its FY21 results and in its outlook statements it noted the following:
- The demand environment is simply too dynamic to be able to provide guidance, and
- While its auto sales division, which includes Ryco and Cooper air, oil and fuel filters, reported showing strong double-digit demand growth in June and early July, the company expects growth to moderate as government stimulus fades along with demand that was brought forward during lockdown.
According to Factset consensus analyst expectations are for EPS to decline by 20.5 per cent. But keep in mind this is an average. Individual brokers will have a wider disparity of numbers than perhaps ever before.
FY21 sector forecasts
Here’s a sector-by-sector breakdown (in alphabetical order) of FY21 forecasts as reported by Factset.
|Mining and metals||-3.7%|
In addition to an avalanche of surprises (keep in mind they are backward looking), it is reasonable to expect dividends to be under pressure from stretched balance sheets. Australian listed companies have raised $29 billion thus far and we would expect dividend cuts and continued capital raisings.
This reporting season will be an outlier in terms of the disparity of forecasts as well as the spreads between expectations and actuals. When markets are this inefficient however, opportunities are frequent. Keep the long term in mind, and start sharpening the pencil.
Any company delivering an earnings “beat” will be welcomed more than is usual.
Why dividends are likely to fall
Dividends are also likely to come down. Typically, the S&P/ASX 200 pays out about 70 per cent of earnings as dividends, but current expectations are for the payout ratio to come down to about 60 per cent. Companies will be very mindful of protecting that balance sheet.
It gets a little better in the current year, FY21. Consensus estimates have market EPS growing by 8.1 per cent, or 11.8 per cent excluding resources, which will be a slight (-1.1 per cent) drag on the market, despite a rebound (+12.2 per cent) from energy earnings. Elsewhere, insurance is projected as a huge recovery (+184 per cent) in FY21, as is Tech (+222 per cent in FY21, after a 9 per cent fall in FY20). Analysts still see weakness in FY21 in Utilities, Telcos, Discretionary Retail, REITs and Mining and Metals.
Another likely feature of this reporting season will be write-downs: companies hit by a sharp downturn in trading conditions will be pressured to devalue assets. We have already seen this happening in the energy sector, from the likes of Woodside Petroleum and Origin Energy.
Outlook statements are always closely scrutinised, but this year, companies that offer them will be very brave – too much remains unknowable about COVID-19. Comments on the financial period so far – that is, trading in July and August – will also be pored over closely. But it’s probably wise not to expect much in the way of earnings guidance for FY21 to be provided.