With the who’s who of the ASX - stocks that move the market - reporting earnings results in February, investors have been left wondering what to make of the interim confession season. Azzet searched for clues.
At face value, reporting season had a "same old, same old" feel about it with a little over half (52%) of stocks delivering a beat against market earnings expectations, slightly down on the historical average of 54%.
On the dividend front, 54% of stocks issued higher dividends, which beat the previous year.
But having run his own rule over the reporting season, AMP chief economist Shane Oliver witnessed increased investor interest in margin trend lines. This was in contrast to whether the headline result was a beat or not.
He also noted that initial market responses to a result didn’t always factor into the broader narrative playing out.
Watching the trend lines
In light of the challenging year ahead, Oliver also witnessed an increased investor fixation on where future growth will come from, when and how much. In short, investors are looking forward, not backwards.
As a case in point, Insurance Australia Group’s (ASX: IAG) reported a 91% jump in first half profit. This was eclipsed by market concerns over management’s guidance around moderating premiums and the share price fell 12.5% on the day.
In a completely different narrative, investors overlooked Eagers Automotive (ASX: APE) reported a 25% drop in annual earnings after the company said it was well positioned to capitalise on its sweet spot in the hybrid car market. As a result, the share price rallied 20%.
It was a similar story at TPG Telecom (ASX: TPG) which saw its share price rise 4% at the open - after disclosing a $107 million annual loss - with the market focusing more on ongoing service revenue growth and stable operating costs.
Pinnacle Investment is another example. The company reported an outstanding result, exceeding analyst expectations by double digits and outlining a multi-year growth trajectory. But despite a flurry of upgrades and buy recommendations, the stock closed 3% lower on the day.
Then there was Woodside Energy (ASX: WDS) which saw its share price jump 3% after the company reported a lower underlying profit.
Bipolar investor sentiment
There was no shortage of similar experiences throughout February’s reporting season. This prompted Macquarie to note that the “nexus between earnings momentum (profit) surprises and price reactions had broken this season.”
“On average, stocks with positive earnings momentum are beating (forecasts) but (their shares are) not outperforming,” the broker said in a recent client note.
“Meanwhile, those with poor momentum are outperforming, often without beats.”
The broker also refers to Domino’s Pizza Enterprises (ASX: DMP) which saw its share price jump 20% despite news it would cut non-performing stores.
Equally bizarre, Audinate Group’s (ASX: AD8) share price skyrocketed 28% after the digital audio company announced a 29% fall in gross profit of $US16 million.
Downgraded FY25 forecasts
Having read the tea leaves within the underlying reporting season commentary, Macquarie decided there was sufficient evidence to downgrade its forecast for ASX200 cumulative profit for FY25 to 3.1%.
Weighing heavily on Macquarie’s outlook was the protracted weakness in commodity prices which is likely to continue impacting big miners.
Macquarie expects earnings per share (EPS) falls of 17.6% for mining stocks this year, following falls of a similar magnitude last year.
However, based on improving trading conditions and lower interest rates, the broker is looking for 6% corporate earnings growth in FY26.
Rotation into cyclicals
While there was a lot of alpha on offer during the reporting season, Jun Bei Liu founder and lead portfolio manager at Ten Cap reminded the market that future rewards will be the opposite of what it has rewarded over the previous 12 months.
Instead of focusing on earnings growth and scarcity at any price, she expects the market to shift its focus towards economic and interest rate leverage.
This means shifting holdings in the hope of cyclical upside.
“For fund managers and investors alike, the key question is how quickly they want to implement this rotation,” says Liu.
“ Too early can leave them prone to disappointment, but too late risks leaving the early gains on the table. We think this is already starting to play out.”
She also reminded the market that over the February reporting season, it was not the companies that delivered quality results that proved most interesting.
Ironically, it was companies that languished due to a combination of factors such as cyclical weakness, interest rate pressures or specific stock overhangs.
As a case in point, despite operating in a challenging retail environment, JB Hi-Fi (ASX: JBH), delivered one of its strongest-ever results, growing sales and profit by 10% in the face of intense competition and weak consumer confidence.
“We are simply seeing the first signs that stocks previously off limits are now back in favour,” said Liu.
