Earnings season under the microscope

The February reporting season proved better than expected as the number of companies meeting earnings forecasts outnumbered those that disappointed the market.

Dividends also rose more than anticipated, largely as a result of increased payouts from financial companies and miners.

Much now depends on the economic outlook, including the extent to which lingering inflation could quell the nation’s spending power.

“Despite results beating expectations, outlook statements were more balanced, and earnings forecasts were marginally revised down,” said Chris Haynes, Head of Equities at Equity Trustees Asset Management. 

“Perversely, cooling inflation may be a negative as it will start to slow top line nominal growth for many companies. Inflation and price rises, which consumers have accepted, have been a key ingredient to stronger than expected earnings over recent times,” Haynes said.

AUSIEX asked three market experts to give their take-outs from the reporting season and what the key results reveal about the outlook for the months ahead.

Sandstone Insights

John Lockton, Head of Investment Strategy

The February reporting season was better than normal. Balance sheets remained strong, driving aggregate dividend upgrades and $1.5 billion worth of new buybacks, though the rising cost of debt remained a headwind to cashflows. 

FY24 earnings expectations were revised down 0.4%, or $600 million, compared to the historic average of closer to -0.7%. S&P/ASX200 dividends were revised up by 1.1% or approximately $1 billion to just over $94 billion. 

Qantas (ASX: QAN) led the way for buy-backs with a $400 million top-up announced. ANZ Group (ASX: ANZ) is likely to undertake a circa $650m buy-back program in May this year following their Asian asset sales. 

Industrial margins were more resilient given abating cost inflation as input prices mean reverted from the pandemic related supply shocks. With margins not likely to contract further, the reporting season provided more evidence that the S&P/ASX200 earning per share momentum is starting to bottom out. 

Consumer demand also remained resilient, with analysts being too negative on the sales declines post the pandemic bounce.

Free cash flows though remain under pressure, with many expansions in capital expenditures (capex) budgets for large industrials partly offset by smaller capex outlay for commodity producers under pressure from rising operating costs.

Financials saw solid upgrades as the banks continued to perform better than expectations, though these were based largely on one-off drivers. Fund managers and financial platforms benefitted from stronger markets, experiencing upgrades as well as demonstrating strong cost control. AUB Group (ASX: AUB) and Block (ASX: SQ2), for example, continued to experience earnings upgrade momentum.

Consumer discretionary was the second-best performing sector during February, up 10%. Low expectations, coupled with positive earnings revisions saw may companies including JB Hi-Fi (JBH), Lovisa (LOV), Wesfarmers (WES) reach all-time highs.

Commodity producers endured a weak reporting season, despite tailwinds from the higher US dollar – though energy producers fared better than miners. These companies continue to face margin-eroding cost inflation, coupled with largely weaker commodity prices. IGO (ASX: IGO) suffered production issues, whilst South32 (ASX: S32) and Pilbara Minerals (ASX: PLS) saw the impact of greater than expected costs to its profits and cash flows. 


Cameron McCormack, Portfolio Manager

Overall, Australian company earnings came in better than expected with beats outweighing misses by a margin of 3:2. Resilient consumer spending, cost management, inflation moderation and positive economic outlooks typified many companies’ results. 

While Australian companies fared better than expected, we would caution that the market is a touch too optimistic on Australia’s economic outlook. Currently inflationary pressures are more pronounced locally than globally, requiring the Reserve Bank of Australia (RBA) to keep rates on hold for longer. While many are already celebrating future rate cuts, we think this is a tad premature. There is an outside chance of another hike. Companies noted an acceleration in labour costs, driving the implementation of cost management initiatives to protect margins.

But overall, the big takeaway is that you want to remain invested in the market and you need diversification. The S&P/ASX 200 is one of the most concentrated markets in the world, dominated by the banks and BHP. Equal weighting Australian equities reduces concentration risk. Potentially consider an underweight position to the big five banks, potentially CBA which is vulnerable to a market correction. 

Australian mid-caps also recorded the strongest upside price target revisions.

We like the prospects of mid-cap industrial companies Aurizon Holdings (ASX: AZJ) and Cleanaway Waste Management (ASX: CWY). These companies offer pricing power which will keep profit margins resilient in an elevated inflation.

Cyclical sectors such as consumer discretionary, real estate and information technology sectors were the standout. Strong results are a byproduct of Australia’s economic and consumer resilience despite the rapid increase in the RBA cash rate. Wesfarmers (ASX: WES) was the standout with earnings 4% ahead of consensus, benefiting from moderation in inflationary cost input pressures and Kmart delivering strong growth in high-margin segments.

Communication services and health care reported the most misses. Seek (ASX: SEK) was an earnings miss following a slowdown in job advertisements in the second half of 2023.

Equity Trustees Asset Management

Chris Haynes, Head of Equities

The results delivered in reporting season were reasonable relative to expectations, due to a combination of resilient economic data, cost management and low analyst expectations.

Despite rising interest costs, corporate balance sheets are relatively healthy. Dividends were also better than expected due to strong payouts from banks and miners. Large caps produced better outcomes than small caps.

Stock price volatility during February was higher than normal with 15% of stocks moving +/-10% and nearly 30% moving +/-5% on the day of their result. Volatility in moves during reporting season has continued to increase over the last decade, allowing nimble and active managers to pounce on stock picking opportunities. 

Despite fears about the impact of rising mortgage costs on overall consumption and economic growth, the domestic environment remained quite resilient up to the end of December 2023. A combination of strong labour markets, strong immigration, accumulated COVID-related savings and higher house prices have preserved consumer spending. This served the consumer discretionary sector well with retailers reporting better-than-expected results and banks reporting low bad debts.

However, digging deeper there is a large divergence in the consumer landscape. Younger demographics are feeling the pinch of higher interest rates, lower real incomes, and lower savings. On the flipside, the older generation have been more supported by the swelling pool of retirement savings, higher rates on term deposits and higher house prices.

FY24 ASX200 earnings growth seems to have plateaued at -5.5%. Earnings in FY25 are expected to rebound by approximately 3.9% but have been slightly downgraded from before reporting season when the market was expecting growth closer to 4.5%. 

While there remains some risk to near term earnings, the stabilisation in earnings revisions and the recent reporting season quality is likely to see investors look through FY24 estimates and focus on the outlook for FY25 and beyond.