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Reporting season: my thoughts so far

Reporting season: my thoughts so far

The domestic economic backdrop, characterised by 13 interest rate hikes, and consumer malaise brought on by the persistent inflation-induced cost of living pressures, had set the stage for modest, if not dour, expectations for reporting season.

Yet, the reaction from the investment community has been anything but reserved. Bloomberg’s analysis reflects a notable uptick in share purchases post-earnings announcements, even while a significant portion of the largest companies have missed profit expectations. According to UBS, companies that have reported earnings ‘beats’ have seen an average share price gain of five per cent, versus a three per cent fall for those whose results missed expectations.

Investors have therefore shown remarkable resilience amid economic challenges and uncertainty over future interest rate cuts. Despite a slight ‘miss’ in corporate profit results, the market response has been positive, suggesting a deeper confidence in the underlying strength of businesses operating in an unclear and mixed macroeconomic landscape.

With approximately 40 per cent of the S&P/ASX 200 Index having reported, there’s been an aggregate earnings increase of just over two per cent, which is slightly below consensus estimates. Much of this is due to the drag of the biggest companies – think Commonwealth Bank of Australia and Telstra – with a further breakdown revealing 47 per cent of companies have exceeded expectations, 19 per cent have met expectations and 37 per cent have missed.

Earnings beats have, therefore, outnumbered misses by a ratio of 2 to 1. Note, however this has perhaps been easier to do than usual because analysts’ expectations were pretty low. 

Amid the small caps we follow, and especially those we own, the results have been pleasing and indeed encouraging. Perhaps thanks to a buoyant U.S. market, expectations that the Fed will eventually cut rates – possibly this year, and continuing disinflation, market sentiment towards innovative growths mall caps is broadly positive.

I note this is something we have suggested could define markets in 2024.

While the energy sector faces headwinds from declining commodity prices, the retail sector has surprised with resilient performances from players including Nick Scali, JB Hi-Fi, Cettire and Temple & Webster, and robust margins and sale results from the likes of Breville Group and Vicinity Centres respectively.

By way of further example, JB Hi-Fi reported a 20 per cent dip in group net profits but the stock surged to a record high on the back of positive outlook statements and better than expected revenue growth from JB Australia, which is responsible for 70 per cent of group sales. 

The positive sentiment has been echoed across approximately half of the reporting companies, which have managed to grow earnings year-over-year, albeit at a slightly lower rate than usual.

Notably, this reporting season has produced optimism when companies have either managed to grow margins even amid declining revenue (think JB Hi-Fi, Downer, Boral, Wesfarmers), or management’s outlook statements have indicated the worst is behind them.

Generally, companies demonstrating a significant level of operational resilience and strategic foresight are being rewarded. Companies navigating the high-interest-rate environment strategically, with cost management and evidence of efficiency improvements yielding improved profit margins, are being rewarded with share price gains. An example is Nick Scali, whose synergies and scale improvements garnered from the acquisition of Plush Furniture have been met with appreciation by investors.

Commonwealth Bank and Telstra’s results reveal earnings pressure that suggests economic challenges do persist. It’s not all good news. The economic outlook is not bright, but it is perhaps brighter than the most negative expectations. Despite this, market reactions have been surprisingly forgiving, suggesting a degree of investor leniency amid those tougher economic conditions.

Perhaps this reporting season has revealed that investors need to consider the interplay between economic indicators, corporate strategies, and investor sentiment. The resilience shown by some companies and the optimism of investors suggest a cautious but hopeful approach to results is the name of the game.

This week is one of the biggest for reporting season, with BHP, RIO, Qantas, Brambles, Lendlease, Cochlear, Woolworths and Fortescue Metals all reporting. In the smaller companies, we will be watching results from ARB, AUB Group, HMC Capital, Hub24, Megaport, Reece, Super Retail Group, Universal Stores, Bapcor, Jumbo, Pilbara Minerals, Auckland International Airport and Lovisa.

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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.

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