This reporting season, we have seen a rising number of companies on the ASX 200 being hit with earnings downgrades (~60%) when looking 12 months ahead, compared to those receiving earnings upgrades (~40%) after reporting their results.
Earnings downgrades for the next 12 months are skewed towards 1H24, with estimates for 2H23 holding up somewhat better (with FY23 full year downgrades
at ~56%).
Overall, on average 12-month earnings forecasts have been downgraded by ~1.3% as analysts have pared back
their expectations.
Market Positioning (As Always) Important
The macro and market sentiment running into these results has been very important.
Market positioning before the result has been a significant driver of the direction of market reaction. Stocks that have traded strongly into their respective result have been hit hard when earnings or trading updates did not live up to heightened market expectations.
Stocks that experienced weakness leading into their result have seen a mix of somewhat muted and strong share price reactions after reporting to the market, sometimes irrespective of the actual numbers.
For instance, Temple & Webster (TPW) climbed 32% between the end of December and the start of February before falling 25% after disappointing the market on the day of its result. Meanwhile, Sonic Healthcare (SHL) traded up 14% on the day, after falling 11% into the result, and has seen earnings downgrades post the result.
Retail – All Over The Shop
It has been a mixed picture for retail during reporting season so far. The sector is up 1% MTD but there has been a large dispersion between results.
We think this is driven by:
- More expensive items being crossed out of household budgets.
- Wealth effect: consumption, which is driven by increases/decreases in household wealth (house prices), has slowed demand for large, durable household items.
- A change in wallet mix towards lower cost items as household budgets start to feel the pinch.
Durable, Household Goods Under Pressure
Updates from Temple & Webster (TPW) and JB Hi-Fi (JBH) last week, and Nick Scali (NCK) the week before, suggest households are cutting back on spending, particularly on high-priced, discretionary items like durable household goods.
As interest rates and inflation continue to squeeze household budgets, consumer demand for big-ticket discretionary goods is eroding. The decline in house prices may been discouraging consumers from buying high-priced, capex-type items. These 2 factors coupled together provide further downside risk, in our view, to durable goods.
Less discretionary, lower price goods offering resilience
As households have started feeling the pinch, we have seen evidence of a shift in wallet spend to less discretionary, lower-cost products. Sales at Wesfarmers' (WES) low-cost stores, Kmart Group, have remained strong since the beginning of the year, as well as a shift to DIY in Bunnings and Super Retail (SUL) brand, Supercheap auto.
Margins to go lower still – more downgrades expected
We still believe margins are likely to fall away over the course of the next 12 months. The prospect of softer topline growth driven by weaker household demand due to interest rate and cost of living pressures, coupled with the potential for increased promotional activity (discounting) and fixed cost deleverage, is ultimately a recipe for weaker operating margins.
Current NPAT margin expectations of retailers still looks too optimistic at 11% vs pre-pandemic 8-9%. Taking a pre-pandemic EBITDA margin (9%) on current sales forecasts would represent a ~18% downgrade to NPAT. This is our base case, but we still see downside to retailers if margins can not remain elevated.
CBA: Wouldn’t Bank On It
After seemingly being priced for perfection going into the result, Commonwealth Bank of Australia (CBA) was down ~6% on the day of reporting.
CBA’s result was generally in-line with consensus, but we think the market was looking for an upgrade based on the share price appreciation into the result, not a downgrade.
The adverse market reaction looked to be primarily driven by concerns around the net interest margin (NIM) peaking at the back end of last year. Management cited higher competitive pressures for crimping margins. We believe this is from competition in both the home loan lending space (lower gross income) and the deposit space (higher funding costs).
We have seen downgrades to FY23 and FY24 NIMs for CBA after the result and NIM optimism peaking. The 12-month forward EPS has also been downgraded by 2.5% since the result.
This is inline with our views in Switching from Banks to Battery Minerals.
Underweight CBA and underweight banks
CBA is one of the best-quality banks in the world, but it is also the most expensive. We still cannot justify the premium it sits on relative to the other big banks, and even after underperforming post-result, this does not change our view.
After CBA’s result and subsequent share price reaction we are still satisfied with our underweight banks call. We still think there are risks for the banks because:
- Credit growth slows from a weaker economy/housing market.
- Competition is still underestimated, translating to lower NIMs than expected.
- Costs are trending up: we have seen cost growth over the past 6 months, this could continue.
| Ticker | Company Name | Result Type | Report Date | 12 Mth Fwd EPS Revisions | Price Change % on day of result |
ISG view |
| RMD | Resmed | Half year | 27/1/2023 | 1.57% | 2.1% | 2Q23 results beat expectations, with diluted EPS of 1.37cps +12% vs Wilsons estimates. AS10/AS11 capacity fuelled further inventory build to fulfil excess demand over 2H23-25E driven by the Philips product recall which we expect to drive market share gains for RMD over the medium-term. |
| PNI | Pinnacle Investment Management | Half year | 1/2/2023 | -5.06% | -7.2% | 1H NPAT was $30.5m, representing a ~16% miss vs Wilsons estimates. FY23 and FY24 NPAT estimates were downgraded as a result. However, the downgrades were driven by elevated costs due to growth investment ($6.5m) which should drive long-term returns for the business. |
| MQG | Macquarie Group | Quarterly | 7/2/2023 | 2.08% | 0.7% | FY23 YTD NPAT was ‘slightly up’ vs FY22 YTD, whereas consensus forecasts (pre result) pointed to an NPAT decline of ~8% in FY23 vs pcp, implying MQG was tracking ahead of analyst expectations heading into 4Q23. Therefore, MQG saw upgrades post result. |
| IAG | IAG | Half year | 13/2/2023 | -0.83% | 4.5% | No major surprises with key figures were pre-released, although the full result provided additional colour on the drivers of IAG's medium-term margin recovery. Gross written premium guidance for FY23 upgraded from high single digit to ~10%, F23 margin guidance downgraded from 14-16% to 10%. Medium-term margin goal of 15-17% was retained. |
| CSL | CSL | Half year | 14/2/2023 | 2.42% | 0.9% | 1H23 NPATA beat Wilsons estimates by +8%, but did not invoke a FY23 guidance upgrade. Result was underpinned by strong immunoglobulin collection trends as expected. |
| JHX | James Hardie | Quarterly | 14/2/2023 | -5.91% | -4.3% | 3Q23 update disappointed, missing consensus for the quarter while downgrading FY23 NPAT guidance another ~10% at the mid-point to a range of US$600m-US$620m. |
| NWL | Netwealth Group | Half year | 15/2/2023 | -0.65% | 2.7% | NPAT $30.6m (in line). FY23 net inflow guidance of $11bn reaffirmed. The trajectory of FUA this CYTD (+4.3%) was particularly positive, which bodes well for 2H23/FY24 earnings. |
| GMG | Goodman Group | Half year | 16/2/2023 | 1.84% | 2.1% | GMG provided an unsurprising upgrade to FY23 operating EPS growth, from 10% to 13.5%, though still below consensus at 15-16%. We expect further upgrades throughout the year. |
| TLS | Telstra Group | Half year | 16/2/2023 | -0.19% | 1.9% | 1H23 EBITDA +11.4% vs pcp, which was a modest beat. FY23 guidance for EBITDA of $7.8-8.0bn, and medium-term targets (e.g. $500m cost out, high teens EPS CAGR), were reaffirmed. |
| HCW | Healthco REIT | Half year | 17/2/2023 | 1.32% | -1.0% | HCW's funds from operations (FFO) guidance for FY23 was upgraded from 6.8 cps to 7.1 cps. FY23 distribution was reaffirmed at 7.5 cents. |
| NST | Northern Star Resources | Half year | 20/2/2023 | 0.14% | -1.5% | Uneventful update as expected. FY23 production and cost guidance was maintained. $300m buyback around 42% complete. 1H23 DPS of 11 cents, slightly above consensus of 10 cents. |
Source: Refinitiv, Wilsons.
Written by
Rob Crookston, Equity Strategist
Rob is an experienced research analyst with a background in both equity strategy and macroeconomics. He has a strong knowledge of equity strategy, asset allocation, and financial and econometric modelling.
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