Earnings trends so far offer little cause for elation
A poor start to the February reporting season is concerning value-oriented investors.
A poor start to the February reporting season is concerning value-oriented investors but it hasn’t stopped the market from rewarding expensively priced companies for any good news.
Brambles, trading on a 12-month forward PE ratio of about 23.5 times versus a decade average of about 17.5 times, jumped as much as 4.6 per cent to $13.42 a share on Monday after reporting first-half sales growth of 7 per cent in constant currency terms.
QBE Insurance, on a forward PE of about 15 times versus a decade average of 12 times, rose 4.3 per cent to a 4½-year high of $14.79 on improved guidance.
Bendigo and Adelaide Bank was halted for a capital raise as it cut its dividend and warned an improvement in its next interest margins and bad debts won’t last.
After the close, high-flying software maker Altium delivered a coronavirus-related profit warning.
As reporting season races towards the halfway mark, the earnings trends aren’t great.
As of last week just 28 per cent of reporting companies had beaten Goldman Sachs’ estimates for earnings per share by more than 2 per cent, well below the long-run average of 39 per cent.
“More concerning, 46 per cent of firms have missed, a far weaker performance than the typical level of 30 per cent,” Goldman Sachs Australia equity strategist Matthew Ross said.
But despite the poor start, the S&P/ASX 200 index hit a record high of 7145.8 points last week.
Shares have remained buoyant this week with nine companies including Altium hitting new highs.
In fact, the market has responded positively to company results so far this month. The average stock has outperformed the market by 1.5 per cent after reporting, while those that have beaten earnings expectations have outperformed by 4.4 per cent on average, and those that have missed expectations have still performed roughly in line with the market.
Despite the larger number of earnings misses, consensus earnings downgrades have been roughly in line with the historical trends, with the consensus for industrial companies’ fiscal 2020 EPS growth cut by 30 basis points to 3.7 per cent.
“Companies are generally giving cautious outlook commentary given the uncertainty around the potential impact of the coronavirus, but in most cases have not yet provided quantitative guidance on the likely impact,” Ross says in a note to clients.
He notes that results have continued to drive a rotation from value to growth stocks, something that’s been a headwind for active fund managers so far this year. “While earnings beats have been more concentrated among premium-rated growth stocks, much of the outperformance of growth over value has come from significant multiple expansion,” he says.
“Active funds have struggled against this backdrop, with the median manager in our sample experiencing its worst month in over 10 years during January.”
He estimates the ASX 200 trades on a hefty 12-month forward PE ratio of 18.7 times and a dividend yield of 3.8 per cent, while the average stock is on a PE of 18 times.
That’s 25 per cent above the 20-year average but the average industrial stock is trading on a PE of 25.6 times, a staggering 51 per cent above the 20-year average.
Meanwhile, Macquarie’s “earnings risk screen” is working well with an average 2.8 per cent return for those with “upside risk” and a 1 per cent fall for those with “downside risk”.
The risk screen finds companies where Macquarie analysis has a counter consensus view of earnings and the consensus is shifting towards its view, equity strategist Matthew Brooks explains.
Stocks considered to have upside risk that are yet to report include Fortescue, oOh!media and Silver Lake Resources, while those with downside risk include Afterpay, Flight Centre, Lendlease, Star Entertainment and Mayne Pharma.
Brooks finds there have been more beats than misses of earnings estimates — based on a 5 per cent threshold — but there have been more downgrades than upgrades of outlooks.
Whereas 21 per cent have beaten consensus earnings estimates and 17 per cent have missed, only 12 per cent of companies have seen earnings upgrades while 15 per cent have seen downgrades.
Macquarie’s consensus earnings estimate for the ASX 300 in fiscal 2020 has fallen 0.5 per cent.
Brooks also finds that most companies have missed dividend estimates and most have had their dividend outlook downgraded.
Record-low interest rates seem to be curing all ills.
Markets rebound but jitters over US trade policy set to linger
Markets bounced back this week after tariffs on Mexico and Canada were delayed by Donald Trump, but a trade war could be just getting started.
Strong demand for gold amid global uncertainty
Though surpassed by far more volatile commodities like coffee, gold has soared almost 10 per cent so far this year, hitting a record high of $US2,870.93 per ounce.