Investors take positive view of company reports

As Australia’s profit reporting season ramps up this week, an encouraging trend is emerging.

While the results are mostly in line with expectations, share price reactions have been “overwhelmingly positive”, according to Macquarie Equities.

Last week saw nine of 11 reporting companies in the S&P/ASX 200 index outperform the benchmark, with an average outperformance of more than 3 per cent on the day of their results.

The pattern continued on Monday with Aurizon, Beach Energy, Car Group and JB Hi-Fi shares rising between 1.7 per cent and 7.1 per cent after their earnings reports, while the ASX 200 fell 0.4 per cent.

ANZ led the major banks with a 1.3 per cent rise after its first-quarter trading update.

The overall market struggled after CSL dived 4.8 per cent as its CSL112 drug – recently touted as part of a “promising portfolio” of investments and one that could “transform” the treatment of heart attack patients – flopped in its phase three trial.

Interestingly, while there have been some solid results so far this reporting season, the share price outperformance of most companies that have reported hasn’t been caused by positive earnings per share surprises or positive guidance causing consensus upgrades.

“In a market fearful of the next domino to fall, upcoming results are an overhang,” Macquarie Equities’ Australian equity strat­egist Matthew Brooks said.

“Once a result is posted, investors seem to be putting money to work given increasing expectations of a soft economic landing supported by interest rate cuts even if delayed a few months.”

It follows a 1 per cent upgrade in the aggregate earnings per share estimate for Australian companies in January.

That upgrade covered 68 per cent of the ASX 200.

Strategists have been reluctant to interpret this as the start of a stronger earnings cycle that most in the market are assuming.

But Mr Brooks said it now looked like investors were buying into stocks after their results in order to gain exposure to what was being perceived as an improving outlook.

“Results announcements remove the risk of a negative surprise,” he said.

Domestic cyclical sectors such as consumer discretionary and media could be among the most likely to benefit from this pattern. Nick Scali was a standout as its shares rose 17 per cent on the first day and 6 per cent on the second day after its report showed better than expected profit margins.

JB Hi-Fi shares jumped on Monday after it reported a solid earnings beat for the December half year and a 1.7 per cent on-year rise in comparable sales for its Australian operations in January, despite tough operating conditions that were expected to cause a slowdown across the retail sector. It comes after JB Hi-Fi shares surged 23 per cent after the Black Friday sales period.

Mr Brooks said property trusts also stood to benefit as the latest Fed survey shows commercial real estate lending was less tight. All 5 REITs outperformed after their results.

All five of the real estate investment trusts that reported last week outperformed the market on the day of their results.

Macquarie’s Mr Brooks said there were some positive signs for commercial real estate in the Senior Loan Officer Opinion Survey released by the Fed last week.

Share price gains came despite news that property developer Mirvac had a 60 per cent run-up in its own financing costs in the December half. Smaller rival Charter Hall Long Wale REIT saw a 33 per cent jump in financing costs. Others such as AGL experienced a 27 per cent jump.

Mr Brooks said surprises in the December half earnings per share had been balanced, but there had been a net positive surprise in profit margins as companies looked to more actively manage costs, including labour. Positive margin surprise was a key driver of gains in AGL, News Corp and Nick Scali.

“While early days, there have been net upgrades to June half year earnings per share estimates,” Mr Brooks said. “This is in contrast to recent results seasons where there was a consistent expectation of impending earnings weakness.

“With initial guidance increasingly looking conservative, the trend of mostly positive revisions to guidance that started in the last AGM season continued in week one with upgrades from Centuria Industrial REIT, AGL Energy, Cochlear and Boral. With downside scenarios less likely, we could see more companies raise the low end of their guidance.”

Some 38 per cent of reporting companies by market capitalisation – including CBA – are due to release their results this week. By next week, 75 per cent of ASX companies by market capitalisation and number will have reported their results, according to Morgan Stanley.