Insights

As reporting season kicks off, investors and analysts alike turn their attention to a critical period of corporate transparency. As ASX-listed companies disclose their earnings, our analysts identify key tactical calls around August results, where stock price reactions are flagged to surprise or disappoint.

To help you navigate this reporting season, our team of analysts have handpicked a list of key stocks in the Bank and Fund Manager space that are worth keeping an eye on.

Banks

Insight from Nathan Lead – Senior Analyst

Bank stocks have outpaced broader market performance recently. However, the high share prices do not seem fully supported by projected Return on Equity (ROE) and Dividend per Share (DPS) growth, which are expected to remain relatively flat over the coming years.

The recent share price performance has largely been driven by an increase in key valuation multiples (Price-to-Earnings (P/E) and Price-to-Book Value (PBV)); CBA’s multiples are especially elevated, trading well above historical norms and peers at about 23x P/E and 3x PBV. Meanwhile, cash dividend yields have compressed significantly, making banks less attractive as an income investment; CBA stands out again given its yield has compressed to about 3.4%. Major domestic banks also appear overvalued compared to global peers, based on the relationship between PBV and Return on Equity.; once again CBA’s valuation appears particularly stretched.

In summary, while bank stocks have performed well, their elevated prices may not be justified by future financial prospects and seem high relative to both domestic and international standards.

Commonwealth Bank of Australia

ASX: CBA | REDUCE | 14 August 2024

The REDUCE rating we apply to CBA is not a recommendation for complete divestment; rather, it is a directive to reduce overweight positions. Given current valuations and earnings outlook, it is difficult to foresee substantial returns from investments in CBA over the next 3-5 years. Loan growth is expected to strengthen, and the decline in Net Interest Margin (NIM) may moderate. However, cost pressures are anticipated from increased amortisation and staff expenses and upward normalisation of credit impairment charges.

Asset quality remains resilient, with low write-offs and limited provisioning growth potentially seeing credit impairment expenses being lower than consensus estimates.

For 2H24, we project pre-provision operating profit and Cash EPS to be 3% lower than 1H24, and the DPS remain flat on pcp at $2.40 per share with an increasing payout ratio.

Capital management will be a focus, with CBA undertaking only minimal share buyback activity ($130 million in 2H24) to distribute excess capital.

Key results to watch:

Loan Growth and NIM: Loan growth is expected to strengthen, while the decline in Net Interest Margin (NIM) is anticipated to moderate.

Cost Growth: An increase in costs is projected, primarily due to higher amortisation and staff expenses.

Asset Quality: Asset quality is likely to remain resilient, with low write-offs and minimal provisioning growth, potentially surpassing consensus expectations.

Capital Management: Watch for how CBA plans to distribute excess capital, given it spent only $130 million on share buybacks in 2H24.

Judo Capital aka Judo Bank

There’s more positive outlook on the small-cap JDO, which specialise in SME-focused business lending. As its ROE improves with earnings growth, we anticipate so too should its Price-to-Book Value. The company is reinvesting its earnings rather than paying dividends, which should result in high single-digit to low double-digit compound annual Book Value per share growth. Although JDO is a higher risk investment proposition than the major banks given it is a challenger bank, it offers the potential for higher returns. JDO presents a compelling opportunity if it meets its at-scale targets, potentially becoming Australia's fastest-growing, most efficient, and profitable bank. Current prices suggest a potential internal rate of return (IRR) of approximately 13% per annum over the next five years. For FY24, the projected profit before tax (PBT) is $107-112 million with gross loans of $10.5-10.7 billion. FY25 PBT is expected to rise to $123-129 million, reflecting about 15% growth.

Key results to watch:

Growth and Efficiency: If the company meets its ambitious targets, it could become the fastest-growing, most efficient, and most profitable bank in Australia.

Stock Valuation: Achieving its at-scale targets could make the stock worth around $2.50 per share, thanks to increased book value per share and a higher price-to-book ratio.

Investment Potential: Purchasing the stock at current prices could offer an estimated annual return of about 13% over the next five years.

Fund Managers | Platforms

Insights from Scott Murdoch – Senior Analyst

GQG Partners

ASX: GQG | ADD | 16 August 2024

Whilst current market conditions are volatile, we expect a positive reaction to GQG’s results. Key investment highlights include a potentially significant performance fee boost, notable operating leverage in the half, and impressive funds under management (FUM) growth of 29%, which supports a strong outlook. Additionally, diversification through the Private Capital Solutions business adds value long-term. Key financial expectations are for management fees up 49% compared to the previous period, and operating profit to increase by 65% including our performance fee expectations (57% excluding performance fees).

Key Results to watch:

Performance fee kicker: We think GQG can report above market expectations, with a kicker from performance fees.

Operating Leverage: Margin improvement is expected on the back of strong revenue growth.

Strong FUM growth: Funds under management grew by 29% in the last half, setting up a solid outlook.

Diversification: Expansion through the new Private Capital Solutions segment to provide diversification.

Want to unlock more investment insights? Our Reporting Season Playbook previews the upcoming results for the period to June 2024 of 155 stocks under coverage. In the report, we call out positive and negative surprise candidates and present an overview of the macroeconomic backdrop.

Become a Morgans client to download the 2024 Playbook.

Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.

A strong result from Eli Lilly overnight came amid a 2.3% surge in the S&P 500, the best day for the index since 2022. Eli Lilly raised sales and profit guidance for the year after a strong performance by its diabetes and weight loss drugs Mounjaro and Zepbound.

Most of the US companies we’re watching have now reported and the frequency of results now slows down. Stocks of interest still yet to report include Home Depot (13 August), Cisco (14 August), Walmart (15 August), Palo Alto Networks (19 August) and NVIDIA (28 August).

Eli Lilly

In contrast to yesterday’s lacklustre result from Novo Nordisk, Eli Lilly knocked it out of the park overnight with a strong Q2 result and an increase in its full year guidance. Quarterly sales of the Zepbound weight-loss drug passed $1 billion for the first time. Supply of both Mounjaro and Zepbound increased during Q2 and Lilly said it was able to backfill orders and increase stocks at wholesalers. Lilly now expects adjusted profit of $45.4-46.6 billion in 2024, up from $42.4-43.6 billion. Some investors have speculated that the strong performance of Eli Lilly in the period means it is outmaneuvering Novo Nordisk in the push to increase manufacturing capacity.

The roundup

Almost all US companies have now released their quarterly earnings. The median EPS beat has been 4.2% and the median yoy EPS growth 9.7%.

This is a featured article from Stockhead's Investor Guide on Health and BioTech FY25. To read the full publication visit here.

Historically, the ASX healthcare sector has delivered strong performance for investors. The S&P/ASX 200 Health Care index outperformed the benchmark S&P/ASX 200 index in seven of the past 10 years, delivering a CAGR of 11.9% compared to 8.1%. As inflation rose, the ASX healthcare sector struggled, but come October 2023 signs of improving investor sentiment emerged.

Looking forward, the outlook feels very positive. Inflation has been sticky and interest rates higher for longer than forecast. However, as rates come down and economic conditions improve, money is expected to continue to flow into the stock market and the emerging healthcare space.

Strong backing for life sciences and biotech

The Australian life sciences ecosystem is worth more than $8 billion in annual revenue and is projected to grow at 3% annually from 2021-2026. Australia’s medical and biotechnology sector has benefited from a multimillion-dollar windfall of government funding and substantial tax breaks for companies investing in R&D. Globally, the sector is projected to be worth around US$3.44 trillion by 2030, and the Federal Government is ensuring Australia will well and truly be at the party.

Milestones and strong sales pushing some stocks higher

As of June 2024 there were 147 companies with a market capitalisation of $236 billion or more on the ASX, according to Bioshares. The top 10 health stocks represent 94% of the total and include blood products giant CSL (ASX:CSL), Cochlear (ASX:COH) and Resmed (ASX:RMD).

As macroeconomic and geopolitical factors continue to impact equity markets, companies hitting major milestones – such as receiving regulatory approval, achieving positive clinical results or securing material sales orders – are performing well.

Those in hot spaces, such as radiopharmaceuticals, are also performing strongly, while solid sales momentum, approaching profitability and leading-edge technologies also tend to move a share price higher.

The lucrative rare diseases market is also getting plenty of attention as investors come to understand the benefits of an orphan drug designation (ODD). In the US perks include increased access to the US FDA, new drug application fee waivers, a potentially faster route to market and seven additional years of exclusivity once a drug is approved.

In most cases, shares are being positively re-rated

After an extended period of under-performance, 2024 has seen several companies refresh management teams and boards or change or refocus strategy in an attempt to revitalise investor interest. In most cases shares are being positively re-rated.

On the M&A front, domestic and international activity has increased. Many larger pharmaceutical and medical device companies with strong post-Covid balance sheets are looking to bolster their portfolios, meaning M&A activity will likely continue throughout 2024.

AI emerging as a major healthcare theme

Artificial intelligence (AI) is also emerging as a theme for healthcare. The Albanese government is investing $30 million in improving access to health services and maintaining Australia’s world class health system.

Healthcare has historically lagged in technology adoption, but the healthcare system’s inherent constraints offer a compelling case for a significant role for AI in the sector’s future. Labour shortages and budgetary pressures are changing current practices, with software being introduced to optimise workflow, enhance scheduling, coordinate care and fortify data security. Also, drug development will likely benefit through shorter development times and improved patient selection, resulting in reduced costs and increasing the number of drugs in the pipeline.

Morgans clients receive exclusive insights such as access to the latest stock and sector coverage featured in the Month Ahead. Contact ustoday to begin your journey with Morgans.

Arguably the best result last night came from Shopify, which beat analyst expectations by nearly 30% as its AI capabilities attracted more merchants to its e-commerce platform. By contrast, there was a rare miss from Novo Nordisk, with its weight-loss drug Wegovy undershooting expectations. Disney posted its first ever profit from the combined streaming businesses of Disney+, Hulu and ESPN+, but warned of more challenging trading in its theme parks. Occidental Petroleum beat consensus on higher production and crude prices.

We are nearing the end of US reporting season and tomorrow will see the last in our series of daily updates for this quarter. The highlight tonight will be the Q2 result from the health care giant Eli Lilly.

Walt Disney

Disney comfortably exceeded consensus EPS estimates, driven mainly by a much better performance in the Entertainment division. The combined streaming businesses of Disney+, Hulu and ESPN+ posted a profit for the first time. Revenue was in line with forecasts and up 4% yoy with weaker sales and licencing of content offsetting a better-than-expected performance by US theme parks. After the strong Q3 EPS performance, Disney said it anticipates full year EPS growth of at least 20% (consensus 12%). It did, however, predict a short-term “moderation in demand” in the theme parks due to a softening consumer environment. Shares fell nearly 5%.

Novo Nordisk

Weaker sales of Novo Nordisk’s weight-loss drug Wegovy in Q3 sent its shares down 8%. This is a rare miss from a company that has seen its shares put on more than 200% since the launch of Wegovy in June 2021 amid a series of profit beats. This has caused investors to worry about competition from Eli Lilly, which reports tomorrow. Overall sales guidance was raised by 2% due to improving GLP-1 Rx trends. Volume trends are improving, which suggests the negative reaction overnight may be short-lived.

Shopify

Shopify beat Q2 EPS expectations by 27% as its AI-enabled tools brought more merchants onto its e-commerce platform. Some of the new brands using Shopify include Toys "R" Us, Mas+ by Lionel Messi and Dios Mio Coffee by Sofia Vergara. Sales were 2% higher than forecast, but good cost discipline magnified the beat at the bottom line. Shares rose 18%, reversing the negative trend since it issued downbeat sales forecasts after its Q4 2023 and Q1 2024 results. The implied outlook for Q3 2024 is 25% higher than consensus.

Occidental Petroleum

Higher oil production in Colorado and higher realised crude prices underpinned a significant profit beat in Q2, with EPS coming in 33% above consensus. Output in the U.S. Permian basin and in the Gulf of Mexico was at the higher end of the company's guidance. Q3 production is expected to increase about 140,000 boepd to 1.390m boepd. The recent acquisition of CrownRock has strengthened Occidental's position in the Permian basin.

The story so far

With nearly all companies now having reported, the median EPS beat is 4.2% and the median EPS growth 9.5%. The top share price reactions have been to Shopify, Spotify and Uber. The most negative have been to Intel, Snap and Ford.

It was a rough night for Airbnb, with shares falling 15% after the bell on a reduction to Q3 guidance, citing a shortening of booking windows around the world. Uber Technologies did the opposite, its shares rising 11% after beating consensus, notably in Delivery margins. Caterpillar achieved an unexpected improvement in margins with steady growth in the US (but weakness in global markets, notably China). Amgen reported earnings in line with expectations, with higher costs offsetting the additional revenue from the acquisition of Horizon. Global Business Travel Group (AMEX) beat forecasts as international corporate travel demand recovers, sending its shares up 17%.

Tonight, we’re watching out for results from Walt Disney, Shopify and Occidental Petroleum.

Amgen

Biotechnology company Amgen’s Q2 EPS fell by 0.6%, largely in line with analyst expectations. This was due to higher expenses, including costs related to development of the experimental obesity drug MariTide, offset a 20% increase in revenue driven by the acquisition in October of rare disease drugmaker Horizon Therapeutics. Shares fell 2% in afterhours trading.

Caterpillar

Caterpillar beat analyst EPS expectations by 8% as higher prices and lower manufacturing costs offset the effects of reduced demand for heavy equipment in key markets outside the US, especially in China but also in Europe. North American sales were up 1%, buoyed by infrastructure investment arising from the Federal Government’s spectacularly misnamed Inflation Reduction Act. Caterpillar increased its full year EPS guidance on the strength of its improved margins. Shares rose 3%.

Uber Technologies

Uber performed well in Q2 with gross bookings up 21% and 1% above consensus; EBITDA up 71% and 4% above consensus; and EPS up 161% and 53% above consensus. Demand trends were stable in Mobility with sales slightly above expectations. Delivery saw steady growth in sales, but 1% below the street, although its profits were higher than forecast. Q3 guidance was in line with current analyst estimates for both bookings and EBITDA.

Airbnb

Airbnb guided to Q3 revenue below analyst expectations, indicating booking windows are shortening around the world, which suggests consumers are leaving it to the last minute to book holidays amid economic uncertainty. This echoes similar comments made by Booking (BKNG.NAS) in July. Airbnb’s Q2 EPS was down 12% and 6% below analyst forecasts. The average cost per night rose 2% to $169.53. Shares fell 15% in afterhours trading.

Global Business Travel Group

A recovery in global travel demand saw EBITDA rise 20%, above analyst expectations and company guidance. The EBITDA margin rose from 18% to 20% driven by lower administrative costs and productivity improvements relating to the use of AI. Transaction growth was 3.8% yoy, with a slowdown in Q2, partly because of the Paris Olympics. Full year guidance was reiterated.

The story so far

76% of results in and the median EPS beat has firmed to +4.1%. The median yoy EPS growth is 9.2%. Most positive share price reactions have been to Global Business Travel Group, Spotify, PayPal and Bristol-Myers Squibb. The most negative have been to Intel, Snap, Ford and Domino’s Pizza.

Investment Watch is a quarterly publication produced by Morgans that delves into key insights for equity and economic strategy. This latest publication will cover;

• Asset Allocation – not the time to play defence
• Economic Strategy – averting a world recession
• Equity Strategy – attention turns to August
• Resources & Energy – domestic gas coming to the boil
• Banks – befuddling
• Updated Morgans Best Ideas

Morgans clients receive exclusive insights such as access to our latest Investment Watch publication. Download the preview now.

Preview

We think the investment landscape remains favourable. The US economic fundamentals are strong with no significant downside risks to growth in the near-term. European leading indicators suggest a turning point is near and China’s cyclical recovery is still gaining momentum after bottoming earlier in the year.

Meanwhile, the Australian economy continues to defy expectations of a sharper slowdown. In our view, this is not the time to play defence and continue to expect growth assets such as equities and property to do well. This quarter, we look at tactical opportunities in private credit, global equities and across the Australian equity market (resources, agriculture, travel and technology).