Earnings season report card – which companies delivered?
Earnings expectations for ASX-listed companies were revised down after a reporting season which revealed how management is dealing with economic dynamics now at play.
The results provided a snapshot of how consumers are faring in the face of cost-of-living pressures, the impact of higher interest rates on business and the cost pressures on companies generally.
Aussie equities performed broadly in line with global equities in August, despite the soft earnings. The S&P/ASX 200 Index was down 4% by mid-August, before rallying into the end of the month to finish 1.5% lower.
AUSIEX asked three market experts to give their take on the latest reporting season and the implications for investors.
John Lockton, Head of Investment Strategy
The big picture
It was a weak reporting season for earnings as revenue upgrades were overwhelmed by higher costs and interest expenses. FY24 earnings-per-share (EPS) estimates for the S&P/ASX 200 were revised down 2% - 3% as a result. Earnings growth for FY23 was zero.
Dividend estimates were downgraded to a lesser extent. Total dividend estimates for FY24 now stand at $91 billion, some 2% lower than prior to reporting season.
Almost $5 billion of new share buybacks were announced, led by Commonwealth Bank (ASX: CBA) and National Australia Bank (ASX:NAB).
With off-market buybacks now no longer an avenue to return unutilised franking credits to shareholders, companies appear to have swapped dividends for on-market buybacks. We expect more on this front before the year is out, with Westpac (ASX:WBC) likely to announce a buyback at its FY23 results in November.
Consumer discretionary was the best performing sector in August as fears that earnings for 2024 would fall to recession-like levels proved to be unfounded.
The real estate sector also delivered gains, predominantly driven by a strong earnings report from Goodman Group (ASX:GMG), which continues to benefit from the incredible amount of data storage requirements for artificial intelligence.
Software company Altium (ASX: ALU) surprised on the upside after delivering a high-quality earnings result, quelling any concerns about slower growth and churn rates. Premier Investments (ASX:PMV) turned out to be oversold on consumer downturn fears which weren’t as bad as anticipated, and its strong balance sheet provides some flexibility for capital management.
Healthcare was the key sector disappointment, with ResMed (ASX:RMD), CSL (ASX:CSL), Ramsay Healthcare (ASX:RHC), Fisher and Paykel Healthcare (ASX:FPH) and Sonic Healthcare (ASX:SHL) all seeing fairly significant earnings downgrades. Margin pressures were the main culprit as the sector’s recovery is taking longer than expected to reach pre-COVID-19 levels.
Cameron McCormack, Portfolio Manager
The big picture
Pro-cyclical sectors including consumer discretionary, financials and real estate reported the strongest net beats (or the highest upside surprises), highlighting the strength of the Australian economy. Consumer staples and information technology saw the biggest skew towards earnings misses.
Australian consumer spending held up despite the rapid increase in interest rates. However, FY24 consensus earnings growth was revised down following concerns about the impact of a ‘rates higher for longer’ environment and elevated input cost pressures. Cost input inflationary pressures are likely to persist in 2024. Companies reported an acceleration in labour, rent and energy costs.
RBA will need to hike one or possibly two times to ensure that inflation falls back into the 2% to 3% band.
Maintaining profit margins will be a major challenge as economic conditions likely weaken.
Many consumer discretionary names demonstrated earnings resilience. Consumers appear unfazed (for now) by the rapid increase in interest rates, fixed rate mortgage cliff and elevated inflation and many retailers reported sales growth for FY23. Names include Wesfarmers (ASX: WES), JB Hi-Fi (ASX: JBH), Super Retail Group (ASX: SUL) and Nick Scali (ASX: NCK). Clearly, near record low unemployment and wealth effect from house price increases contributed positively.
REIT earnings per share came in higher than expected with retail REITs Vicinity Group (ASX: VCX) and Scentre Group (ASX: SCG) the standouts. Both companies benefited from strong retail sales, reporting solid rental price growth and improvements in occupancy rates.
Consumer staples disappointed with Coles Group (ASX: COL) notably reporting an increase in theft. Surprisingly, Woolworths didn’t report the same trend. Cost of living pressures are starting to bite in lower socio-economic areas. However, Coles did note that food price inflation is starting to ease.
Alexander Cousley, Investment Strategist
The big picture
Earnings season showed the macro environment is slowing but is not flashing red signs of a recession. Secondly, the proportion of earnings ‘beats’ and ‘misses’ was pretty close to average levels. The final takeaway was the guidance from corporates was a bit softer and that led to analysts revising down their expectations for FY24.
Earnings growth overall for FY23 came in at -6%, with analysts cutting their estimates through the earnings season to now expecting 6% EPS growth for FY24. The dividend payout ratio for Australian shares has historically been around 70% but fell to 62% as companies retained more of their earnings for capital expenditure purposes. BHP (ASX: BHP) and Rio Tinto (ASX: RIO) were good examples and mining companies also cut their dividends from record levels as commodity prices have moderated somewhat, reducing their earnings.
In terms of proportion of companies beating expectations, materials and communication services were the real standouts. Some notable surprises included James Hardie (ASX: JHX), Origin Energy (ASX: ORG) and Boral (ASX: BLD).
Consumer staples and information technology saw the largest skew towards missing expectations. Consumer discretionary and staples saw a decline in FY24 expectations, as well as real estate. Some notable misses included WiseTech Global (ASX: WTC) and Iluka Resources (ASX: ILU).
Three key themes came out of earnings season: the health of the consumer, the evolution of cost pressures and profit margins, and companies’ response to higher interest rates.
The results showed consumers are holding up better than many had feared. Cost pressures continue to be a key focus for investors. Corporates noted some cost pressures remain, but they are taking measures to offset some of the headwinds. This has meant margins have seen less erosion than otherwise.
Finally, on interest rates, we have started to see some impact of higher rates starting to flow through to earnings. This has been most notable for real estate investment trusts, where several companies announced that interest expense had risen faster than expected.