What to make of reporting season

What to make of reporting season

As detailed in one of our blogs in late July, the confession season had been relatively sparse this year. This set the market up for greater levels of earnings surprise than in previous years, and this is exactly what the reporting season delivered.

While the overall market as measured by the S&P/ASX 300 was only marginally down over the month of August, there were some dramatic movements in the share prices of individual companies. The volatility in individual names was not only skewed to the downside, but also included a number of significant jumps in the value of some companies.

The month opened with a 25 basis point rate cut from the RBA. This coincided with the quarterly updates of Westpac, NAB and ANZ as well as the full year results of CBA and Bendigo & Adelaide Bank.  They chose to pass on around 15 basis points of the 25 point cut to their standard variable mortgage rates. The reason for this was apparent from the bank results, which generally showed downward pressure on net interest margins due to the decision to pass on the full 25 point cut in May, increased competition for new loans in both mortgages and business, as well as a limited ability to reduce funding costs given that transaction deposit rates are already close to zero.

While any variation in the FY16 results from expectations generated a significant reaction from the market, in more cases than not it was the outlook commentary that tended to create the more significant reaction.

This was certainly the case for Blackmores, which fell 22 per cent in August as a result of comments from management that sales in the September quarter are likely to be lower than in the prior year due to Chinese customers reducing stock levels.

Aurizon similarly delivered a result that was in line with market expectations, but pointed to a weaker outlook in FY17, with the stock falling 6 per cent on the day of the result, and by 13 per cent in the month of August.

The aged care stocks were savagely dealt with by the market on the back of disappointing results and outlooks. This was compounded earlier this week by comments from Government that it believes legislation will prevent these companies from levying additional fees to boost margins unless they are related to additional services provided. This highlights the risks associated with stocks that are significantly exposed to regulatory changes that can materially impact returns. Three aged care stocks are down between 22 per cent and 44 per cent since the middle of August.

On the positive side, consumer discretionary retailers tended to surprise on the upside, with stronger sales growth continuing into July for JB Hi Fi, Harvey Norman and Nick Scali.

Stocks that provided positive surprise on both earnings results and their outlook received a more significant bump from the market. This included Downer EDI, Credit Corp, Treasury Wine Estates and Ansell.

Then there were stocks that merely had to meet expectations to see their share prices recover. These included Coca Cola Amatil, Isentia, Cleanaway and GWA.

So while an external observer might look at the movement in the broader index over the last month and conclude that not much happened, like the duck paddling on the lake, there was a lot of activity going on under the surface.

Montgomery owns shares in CBA, iSentia and Westpac.