- As attention turns to the February first half reporting season, earnings estimates continue to defy expectations of an imminent slowdown. However, fears that they will materially decelerate in 2H23 will temper sentiment when anticipated headwinds from rising interest rates hits home.
- Quantity and quality of earnings will come into focus as the macro takes a back seat to company fundamentals. Key themes to watch include FY23 earnings trends, cyclical signposts (consumer demand, industrial margins), China restart short selling and positioning in resources.
- Morgans analysts preview the results for 145 stocks under coverage that report in February and call out likely surprise and disappoint candidates from page 14.
- Key tactical trades (page 3) include Qantas (ASX:QAN), Megaport (ASX:MP1), Lovisa (ASX:LOV), Coles (ASX:COL) and HomeCo Daily Needs REIT (ASX:HDN).
No imminent slowdown
As attention turns to the February first half reporting season, earnings estimates continue to defy expectations of an imminent slowdown. ASX 200 earnings remain resilient despite deep cuts to estimates in other developed markets.
We point to the lack of guidance, frequency of trading updates and less acute inflation as reasons why forecasts have held up against the negative sentiment.
Headline estimates point to ASX Industrials growing 5.5% EPS in FY23 before tracking sideways in FY24-25. While growth looks subdued, corporate performance divergence will provide investors with opportunities. The broad valuation de-rating in 2022 will also give some further shelter.
With renewed focus on fundamentals, identifying companies that are less prone to earnings erosion will be key. These include companies that have a growing earnings profile, strong cash flow profiles and are trading at reasonable valuations.
Our preferred exposures include Qantas (ASX:QAN), Telstra Group (ASX:TLS), QBE Insurance Group (ASX:QBE), Treasury Wine Estate (ASX:TWE), and Corporate Travel Management (ASX:CTD).
Consumer and commodities – playing the cycle
The long-anticipated consumer slowdown so far has been more gentle than the market feared. We expect 1H retail results overall to be reasonable, but investors will be ever-cautious on the 12-month outlook.
However, we don’t see a ‘cliff’s edge’ for retail with the pace of decline potentially less pronounced than analysts are forecasting. The current balance of market expectations supports price strength in the more resilient retailers, especially those capable of growing market share (JBH, BLX, and UNI).
Dramatically improved sentiment – fueled by China re-opening – has arguably pushed the resources sector slightly ahead of fundamentals. While the medium-term outlook is compelling, we expect a bumpy ride in 2023 and prefer to stick with key producers South32 (ASX:S32), Mineral Resources (ASX:MIN), Santos (ASX:STO), and Karoon Energy (ASX:KAR).
Volatility bound – decoding the short interest signals
As the ASX 200 closes in on its 2022 high, short interest has been accumulating. We think illiquidity and uncertain trading conditions have brought short positions sharply into focus.
We’ve argued that earnings will attract greater focus this season as macro concerns affecting equities have eased in recent weeks.
We think conditions are ripe for volatility in and around the results with average days-to-cover increasing and significant crowding in individual stocks.
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