Ten investment takeaways from the earnings season

Bumper profits from last year are not enough to satisfy investors as the market outlook is clouding over. Here are 10 things every investor should know about the results season.

Overall returns from the sharemarket this year may look high but not when we subtract the eroding force of ­inflation.

This year the reporting season matters more than usual. That’s because the economy is set to slide and inflation remains untamed.

Against such a backdrop profits and dividends are going to be valued much more than prospects and forecasts.

We are now at a point where we can tell the wood from the trees. Here are 10 things every investor should know about the results season.

Encouraging results

This year expectations were already very high – analysts expected a 20 per cent-plus lift in earnings per share across the board. As it turned out more companies beat their forecasts than missed them.

However, the volume of companies offering positive surprises was slim, with 30 per cent of beats against 27 per cent of misses.

Overall, it was a very good year, which unfortunately is now pure history, as we face the sobering conditions of the financial year that runs until June 30, 2023.

Challenging outlook

The ratio of profit upgrades to profit downgrades after companies announce their results is a key pointer to the year ahead. The bad news is that downgrades are coming out at almost three times the rate of upgrades. At the most recent reading there were 76 downgrades and 27 upgrades.

Among those downgrades were healthcare leader Ramsay, Computershare, Reliance and Bendigo Bank. Upgrades include battered healthcare stock Blackmores, software group Altium and healthcare insurer NIB.

High expectations

If we are to believe the consensus, then Australian shares will follow the bumper year to June 30, 2022 with another above-average year in the 12 months to June 30, 2023. The consensus EPS growth estimate for 2023 is just under 7 per cent. Inside this consensus number there are wide variations.

Macquarie is quite conservative and forecasts modest EPS growth for this year near 3 per cent. Citi is relatively optimistic, the global bank offering a forecast of almost 8 per cent.

Should the Citi estimate come to pass – or even the consensus forecasts of 7 per cent, and you add your 4.5 per cent dividend yield – then we are looking at double-digit growth in your share portfolio again this year.

Don’t forget inflation

Even if your investment portfolio brings in double-digit growth it has to be viewed against the rise in inflation, which is currently running at annualised rate of more than 6 per cent.

Earlier this week the chairman of the Future Fund, Peter Costello, explained that the fund has a target return of inflation plus 4 to 5 per cent. Costello pointed out that under current conditions that means the fund would have to make more than 10 per cent this year.

Costello warned that even the Future Fund, with its army of investment talent – and hedge fund investments that can return 20 to 40 per cent in 12 months – should not be expected to achieve 10 per cent-plus returns.

Private investors might be wise to think the same way – overall returns from the sharemarket this year may look high but not when we subtract the eroding force of ­inflation.

Optimistic forecasts

The profit downgrades are coming thick and fast as the reporting season comes to a close. Bit by bit the 7 per cent EPS forecast for this year will very likely be whittled away, especially as costs escalate.

The wider market still depends heavily on banks and miners which are expected to offer solid returns as banks motor through the months ahead and miners return lower – but still healthy – returns.

However, a very mixed outlook for general industrials means the wider EPS forecast could easily drop back closer to 5.5 per cent, which might be disappointing – but it happens to be spot on the long-term average.

Disappointments loom

The year to June was a great time to be a mining stock. Making money has rarely been easier. Yet a range of mining companies managed to disappoint investors. The problem tended to be either less-than-expected dividend payouts (such as Rio) or more typically ‘‘operational issues’’.

Among the miners that missed expectations were takeover target OZ Minerals, gold miners Resolute and Westgold and lithium play Pilbara Minerals.

Tech tonic

The IT sector had more upgrades than any other part of the market – it also shined with the best post-results share price performance. Essentially, this sector was oversold in recent months.

For investors the issue is that unlike, say, the major banks, where the variation in performance is moderate, the variation in results among IT stocks is immense.

Over the last year some IT stocks – such as WiseTech – seriously impressed with a 25 per cent lift in revenue and a 71 per cent increase in profit.

In contrast, at software group Appen – where the share price has been decimated, falling from $37 to $3.64 – profits fell more than 60 per cent and worse still, the downturn was much worse than the market was expecting.

In the money

Inside the broking industry there are always so-called ‘‘conviction calls’’ which might be explained as stocks the broker really thinks are buys as opposed to having a “buy” on the stock as a default position.

Two stocks that paid off as conviction calls this time around came from deeply unfashionable sectors: oil and animal feed. Morgan Stanley had a conviction call on Woodside Energy and it paid off handsomely as the resource major produced a 400 per cent lift in profit (and tripled its dividend). UBS had a similar call on Ridley Corp, which managed a 70 per cent profit lift.

Post-pandemic

The heady combination of lockdowns and a swing to liquidity-fuelled growth stocks in 2021 caused a lot of heartache in 2022.

A standout example of post-pandemic pain is online retailer Kogan. During the pandemic the company offered good results and the sharemarket went silly on the stock. Kogan hit a stratospheric $25 in October 2020 – today it is valued at $3.50. What’s more, the company just reported wayward stock inventory control and ‘‘fluctuating consumer demand’’, which combined to produce a massive $36m loss.

Dividends are your friend

Commonwealth Bank and BHP stole the show this season with their dividend payouts. But across the market the ‘‘expected forward payout ratio’’ is sliding from near 70 per cent to a forecast closer to 60 per cent.

Many investors will search for stocks which managed to surprise with growing dividends – one the most sought-after factors in the market this year.

Among the major payers are CSL, Woodside and … wait for it, Telstra. Yes, the drifting telco managed to let profits drop, but announced its first dividend increase in seven years.