Reporting season quick takes
Amid a hectic reporting week, we offer the following quick takes, highlighting the results of key, high-quality companies.
Cochlear (ASX:COH)
It was Cochlear’s guidance that caught some investors by surprise, particularly those that had set high expectations after 18 months of robust growth. FY25 guidance for net profit after taxes (NPAT) growth of 6-11 per cent came in below some projections, mainly due to a deceleration in unit sales during the second half – thanks to capacity constraints – and a contraction in services revenue. The slowdown, however, is not unusual and aligns with the familiar pattern observed in upgrade cycles in relatively volatile tender markets. As we have written previously, Cochlear is barely touching the sides of its addressable market despite being the biggest in the market. Cochlear’s long-term growth narrative, therefore, remains compelling, with management reaffirming its commitment to reinvesting in the business – a strategy that, while dampening hopes for immediate margin expansion, supports long-term growth.
Treasury Wine Estates (ASX:TWE)
A particular standout for Treasury Wine Estates was the performance of its premium Penfold’s brand, which beat sales expectations on three million cases and one billion dollars of sales in FY24. The removal of tariffs by China was cited as a reason. Indeed, with respect to China, the company noted stock depletions there, which should translate to re-ordering in the first quarter of the new financial year. While parallel imports do exist, the reality is that they are not a new challenge for the company, which is working towards closing any price difference.
Accelerating Treasury Wine Estates’ premium and luxury portfolio growth strategy in the U.S. and globally, the acquisition of California-based DAOU vineyards (for US$900 million upfront) is progressing as planned, with US$20 million of synergies targeted. Notably, DAOU is the fastest-growing luxury wine brand in the U.S..
Analysts expect Treasury Wine Estates to deliver over 50 per cent earnings before interest and taxes (EBIT) growth over the next three years, and FY25 EBIT guidance of $780-$810 million is in line with expectations.
Audinate (ASX:AD8)
Audinate posted revenue of US$60 million, up 28 per cent year-on-year and 31 per cent to $92 million in Australian dollars. Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were in line with consensus, up 85 per cent to $20.4 million. Importantly, the company met or exceeded its previous guidance. Operating Cash flow of $25.4 million was up more than 100 per cent to $25.4 million, and the company generated positive free cash flow of $6.9 million, up $11.2 million from the previous corresponding period. Gross profit rose 33 per cent to US$44.5 million and 35 per cent to $68 million versus guidance of 26-31 per cent growth.
Notably, there was a deceleration in gross profit growth in the second half of FY24 to 19 per cent from 49 per cent growth in the first half. While gross profit growth slowed in the second half, the gross margin increased from 71.8 per cent in the first half to 76.8 per cent in the second half. This was driven by product mix and lower costs on the company’s product range, the ‘Dante Brooklyn’ audio/ video (AV) networking offering. Chip, card and module revenue were up 26 per cent year on year, driven by the ‘Brooklyn’ and ‘Ultimo’ product lines. Software (IP Core, DEP, retail software) was up 33 per cent, decelerating in the second half.
In video, which is one of the company’s major future growth drivers, the company had aimed to “double the video ecosystem” and targeted more than 30,000 video units in field or shipped. In the second half, the company had “substantially” beaten that target.
The company added four new original equipment manufacturers (OEM) partners in the second half on top of the 16 new OEMs in the first half. Eighteen new video products were launched in the second half and 18 in the first half.
In terms of guidance, the company expects U.S.-dollar gross profit to be marginally lower than FY24, and revenue to decline in 2025. Meanwhile, costs are expected to grow seven to nine per cent, which compares favourably to the 28.5 per cent annual cost growth experienced over the last three years.
As we have noted previously, if Audinate can replicate in video (a much larger market) what it has achieved in audio, this company could be multiples of its current size.
Reece (ASX:REH)
Plumbing retailer and distributor Reece reported sales of $9.105 billion, beating expectations by one per cent. Group EBIT was two per cent lower than consensus at $681 million, with the Australian business missing expectations by six per cent and the U.S. ahead of expectations by five per cent. NPAT of $419 million was in line with expectations.
The big difference was Australia’s margin, which was 14.6 per cent versus consensus expectations for 15.2 per cent.
The company noted a subdued outlook, which was also expected. Interestingly, though, for the residential construction industry, Reece noted that the building backlog has largely been worked through. Meanwhile, housing activity is soft. We know this from new housing starts data.
The Montgomery Fund and the Montgomery [Private] Fund owns shares in Cochlear and Treasury Wine Estates. This article was prepared 29 August 2024 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Cochlear or Treasury Wine Estates, you should seek financial advice.
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.
