Companies missing the mark in reporting season face investor wrath

Cautious outlooks from companies amid macroeconomic headwinds are seeing more negative share price reactions despite a majority of reports beating expectations.

Cautious outlooks from Australian companies amid macroeconomic headwinds are seeing more negative share price reactions this month despite a majority of reports beating expectations.

Shares of construction materials supplier Adbri and plumbing products supplier Reliance Worldwide dropped on Monday after sharp falls in ASX Limited, Beach Petroleum, Bendigo & Adelaide Bank, Challenger, Downer, Evolution Mining, TPG Telecom, Seek and Xero last week.

Adbri plunged 17 per cent to a two-year low of $2.21 after reporting a lower underlying profit, a dividend cut and lower margins, while Reliance fell 6.2 per cent to $4.23 after warning of “weaker global economic conditions and the risk of recessions.”

But share price reactions in aggregate have had a negative skew this reporting season – whether earnings have beaten or missed expectations – in many cases due to disappointment with dividends and guidance, analysts said.

“Our first take of reporting season is a mixed season with each key metric sending different signals; beats and misses are in line for earnings per share, there have been more dividends per share than misses, while revenue has been skewed to the downside,” said Morgan Stanley equity strategist Chris Nicol.

“Initial results-day reactions have been negative on average with beats and misses underperforming the index. After the rally, we see the S&P/ASX 200 at fair value with a downside bias.”

While there’s still time for improvement, results season often saves the worst for last.

Nicol said that after signs of “peaking earnings levels and margins”, the bias among analysts in regard to revisions of their earnings estimates for corporate Australia was “softer” and the share price reaction to results was “more negatively skewed”.

“Indeed the index has risen during the month but it has been a few select stocks and companies that are yet to report that have driven levels higher, with one day and post result price reactions noticeably negative and agnostic to beats or misses in aggregate,” he added.

It came after the US Conference Board’s leading economic index last week showed an increased risk of recession in the world’s No 1 economy. Citi saw a 50 per cent chance of a global recession.

Macquarie also noted some worrisome trends for the local market in terms of the August reporting season so far.

Results for earnings per share were exceeding consensus estimates by less than they did in February, dividends tended to “miss” consensus estimates and guidance was generally “soft”.

Of the 55 stocks that reported last week, 33 per cent beat Macquarie’s June half year earnings per share by at least 5 per cent, while 20 per cent missed the broker’s estimates. “This is an earnings per share beats-to-misses ratio of 1.6 times, down from 2.3 times in the first half of the reporting season,” said Macquarie’s Australian equity strategist Matthew Brooks. The overall “beats-to-misses ratio” for the August reporting season so far has been 1.8 times. He said there had also been “noticeable disappointment when it comes to dividends”.

While free cash flow had been better than expected – especially for resources – capital returns had “disappointed, with net dividend misses and few buybacks”.

Moreover, consensus estimates among analysts for fiscal 2023 earnings and dividends per share have been downgraded for twice as many stocks relative to those that have seen upgrades.

“Given earnings are above expectations, it is somewhat surprising dividends are missing,” said Brooks.

While dividends often tend to hold up better than earnings as payout ratios are “flexed to account for temporary earnings challenges”, what may be an emerging trend of companies paying out less “makes sense given the risks to growth and the challenges created by the inflationary environment”.

Brooks also noted that inventories remain higher than expected, which was a “risk to earnings” and could signal a slowing business cycle as central banks tighten monetary policy as inflation bites.

While about 77 per cent of results have yielded some guidance, only 39 per cent of this guidance has been quantitative and 13 per cent said earnings will fall. Some 54 per cent of the companies offering guidance were in the real estate sector, where rising costs were a “key headwind”.

Brooks also noted that, in terms of direction, if a 5 per cent threshold was used to compare fiscal 2023 earnings guidance to consensus estimates, 27 per cent of reporting companies were below versus only 5 per cent above, but if a 2.5 per cent threshold was used, 62 per cent were below.

“Given macro headwinds, we expected guidance to be conservative and some have set expectations at a level they can beat, but the number of stocks with disappointing guidance is high,” he added. “We still think it is hard to make a bull case for stocks, we are early in an earnings downgrade cycle and the Fed/RBA are likely to tighten further.”