• We think investors can take comfort from an overall resilient earnings outlook, and that the conservatism which has been built into market expectations since the pandemic appears to remain in place, providing a margin of safety.
  • While aggregate EPS revisions were in line with the August reporting season, large caps well outperformed small caps. Large caps registered the highest proportion of beats in 7 years (41%) while small caps disappointed far more than usual with 32% missing.
  • Our best ideas from reporting season include Endeavour Group Ltd (ASX:EDV), Wesfarmers Ltd (ASX:WES), QBE Insurance Group Ltd (ASX:QBE), CSL Limited (ASX:CSL), Qantas Airways Limited (ASX:QAN), Ventia Services Group Ltd (ASX:VNT), Tourism Holdings Ltd (ASX:THL) and Lovisa (ASX:LOV).


In a holding pattern

Investor concern around the collapse of earnings expectations again proved to be premature as resilient trading conditions continue. The median industrial FY23 EPS revision was -1.2% and most results (59%) fell within a 5% range.

While there are early indications that higher interest rates and inflation are starting to bite (Supermarkets, Automotive, Housing and Housing-related Retailers), volumes and better pricing (Packaging, Insurers, Banks, market-leading Retailers) have been enough to quell the risks for now.

As we noted in our preview, we don’t disagree that higher interest rates signify lower earnings growth but is the market right to be worried about a collapse in earnings expectations?

We don’t think so, but the May ‘confession’ season is shaping up to be a pivotal period to confirm our view. The interest rate cycle has further to run and the peak roll-off in fixed rate mortgages won’t hit until 2H 2023.

So confidence around ‘normalised’ earnings may not materialise before FY24, thus doing little to ease investor concerns in the near term. Unsurprisingly, companies are still hesitant to provide guidance, leaving plenty of scope for earnings to surprise in both directions over the next few months.

Winners: market stalwarts and Losers: growth

Winners: Market stalwarts bucked the weaker trend finishing flat against the ASX 200 which fell 2.9% in February. 43% beat consensus expectations; on average, the cohort saw positive revisions to their earnings and margin outlook.

Strong trading conditions (SUL, GMG, QBE, EDV, SHL) and the ability to pass on costs (BXB, EDV, RMD, WOW, TLS) drove outperformance.

Losers: Growth stocks endured a tough reporting season with the cohort down -3.7% to-date. A few notable underperformers include: TPW, ART, DMP, EML, IEL. Growth hasn’t been helped by the reassessment of long-term interest rates which has driven further compression in valuations.

While the macro backdrop remains challenging for valuations, elevated expectations were also reflected in downward revisions to EPS, with FY23-24 forecasts slashed (Page 10).

Beware the second half skew

Notable companies (DHG, AGL, AMC, BBN, ANN, SLC) missed forecasts in February. Still, they maintained their full-year guidance, setting the scene for potential earnings disappointment if operating conditions don’t recover as planned.

Consensus industrial estimates suggest a second half earnings skew (49%:51%) which is curious given the economic backdrop and is at odds with the typical pre-COVID first half skew (56%:44%).

More specifically, 49% of companies are expected to be skewed to 2H, well above the 25% in pre-COVID times. So if post-reporting earnings trends hold, small caps could be again vulnerable at the upcoming May ‘confession’ season.

Tracking management sentiment

We analysed 102 company result transcripts across 23 industries (Page 7). Overall, sentiment leaned negative across all sectors and was most acute in Utilities, Packaging and Building Materials. It’s also notable these sectors saw sentiment fall further from the August results implying conditions are yet to turn around.

Although still striking a cautious tone, Healthcare, Media, Online and Gaming had the highest sentiment readings across the group. Healthcare and Gaming saw a slight improvement in sentiment from the August result.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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We think investors can take comfort from an overall resilient earnings outlook, and that the conservatism which has been built into market expectations since the pandemic appears to remain in place, providing a margin of safety.
Find out more