There’s always a risk of reading too much too soon into earnings seasons. The current reporting period, mostly for interim results, has analysts scrambling to identify stock winners and losers and themes that give clues to the market’s outlook this year and next.
In truth, it is too soon to be definitive. We’re about halfway through the earning season, although several large-caps have reported this week. With earnings disappointments often clustered towards the end, we might see more “misses” than “beats” to come.
What is clear is the market’s savage reaction to positive or negative earnings surprises. A2 Milk soared 30 per cent after releasing a stellar result on Wednesday. Intellectual property adviser IPH was smacked 20 per cent after posting disappointing earnings.
For traders and active investors, earnings seasons increasingly resemble a battlefield strewn with landmines. Such is the influence of computer-based trading programs and the heightened volality for companies that badly disappoint the market’s earnings expectations.
Not my emphasis on expectations. It’s not about what the company reports or does not. It’s about how that compares to expectations, or the consensus analyst forecast. Companies that massage the market’s expectations lower, then exceed them, sometimes get a standing ovation from investors, even though the result was average. The opposite is also true.
Caveats aside, this interim reporting season has some interesting trends. Here are five.
1. Strength in mining services/resources
The quality of CIMIC Group and Monadelphous’ results impressed. CIMIC just topped market expectations and both companies gave positive guidance for FY18. Their results bode well for other mining-services companies that are benefiting from a pick-up in resource-sector activity.
A few small- and mid-cap miners also beat market expectations: Mount Gibson Iron, Evolution Mining and Minerals Resources, for example. South32 was the big disappointment so far, but there’s a good chance more resource companies and related service providers are doing better than the market expects as global growth improves and commodity prices rise.
2. Consumer not as weak as data suggests
Government data on retail sales growth and private-sector sentiment surveys over the past 12 months painted a bleak picture of the consumer. But interim earnings results from consumer discretionary companies suggest it is not as bad as the data implies.
As Macquarie notes, earnings beats and misses in the consumer discretionary sector have been reasonably even and two thirds of retailers that have reported have topped market expectations on revenue growth. That’s not bad given how much gloom was priced into retail last year.
My hunch is that much of it relates to market expectations. Investors drove the expectations bar for retailers too low, allowing more of them to get over it. My contrarian call late last year in The Bull to buy select retailers still stands, notwithstanding recent disappointments such as Super Retail Group.
3. Life sciences cream rises to the top
Biopharmaceutical giant CSL delivered one of the stand-out results of the earnings season so far, trumping market expectations on revenue and profit growth. The market continues to underestimate CSL’s earning growth and the value of its blood-plasma network.
Sleep apnoea device-maker ResMed Inc also beat market expectations, its shares jumping on the news. Hearing-implant maker Cochlear missed market expectations on earnings but reaffirmed guidance for FY18. Cochlear might have suffered from expectations being too high.
Of the three stocks, Cochlear looks the one to buy. Recent gains in the company’s share price suggest investors are willing to look through a half that slightly disappointed.
4. Offshore earners do Australia proud
A recurring theme of this column in the past two years has been to own companies with offshore exposure, principally to the United States. Reliance Worldwide Corporation and James Hardie Industries, both benefiting from a stronger US housing cycle, are examples.
Boral, James Hardie, Treasury Wine Estates, News Corp and, as mentioned, CSL and Resmed, beat market expectations with earnings. They reinforce the view that owning companies with exposure to faster-growing economies than Australia’s makes sense.
If the Australian dollar moderately declines over the next 12 months, as I expect, the offshore earners will look even more attractive.
5. Education stocks provide market lesson
IDP Education, a provider of English-language testing and international student placement, delivered one of the best earnings results, its shares rallying on the news. IDP, a column favourite, is capitalising on strong demand for education in emerging markets.
Education software provider 3P Learning also beat market expectations. After disappointing for the past two years, 3P is finally capitalising on its potential to take Mathletics and other of its well-regarded online learning programs to new markets.
Navitas was the main disappointment, its shares falling almost 10 per cent after it missed market expectations. The stock is best avoided, for now.
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• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article you should consider the appropriateness and accuracy of the information, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at Feb 21, 2018.