Reporting season stock picks

About the author:

Andrew Tang
Author name:
By Andrew Tang
Job title:
Analyst - Equity Strategy
Date posted:
19 July 2016, 2:11 PM
Sectors Covered:
Equity Strategy and Quant

Reporting season strategy

The market will turn its attention to fundamentals in August as reported earnings will be evaluated against an elevated market PE of >16x. Central banks have proven to be the antidote for equity markets against a global backdrop of economic, political and social uncertainty. However, with sections of the market now trading on full valuations, growth in corporate earnings is key if markets are to re-rate further.

Growth scarcity creates risks and opportunities

Strong growth in earnings per share remains a scarce commodity among industrial companies with the top 200 industrials growing profits at a modest 3-4% in CY16. This scarcity is driving premium valuations on those stocks reporting strong EPS growth, which has been concentrated in 'high PE' mid-to-small-cap companies, where investors have enjoyed excellent gains. However, we caution that the divergence between the most expensive (high PE) stocks and cheapest (low PE) stocks looks extended and note that the market has been brutal to high PE stocks that have disappointed.

We think the widening divergence in valuations presents opportunities in overlooked segments such as resources, energy and select industrials, where earnings momentum has been turning positive, and we think the propensity for these stocks to surprise remains quite high.

Re-positioning around stock-specific catalysts

While the market has been riding a wave of stimulus-induced optimism post-Brexit, we remind investors to be wary of complacency heading into the August reporting season. We advocate trimming risk, and re-positioning into stocks where earnings risks are skewed to the upside, preferably backed by bottom-up conviction. 

We highlight four companies as upside surprise candidates this reporting season, along with comments from our team of Research Analysts:

  • Sydney Airport (SYD) – Looking for a potential upgrade to FY/CY16 Dividends per share guidance of 30 cps given recent strength in traffic volumes. We are in line with guidance.
  • ResMed Inc. (RMD) – RMD is an FX beneficiary, its push into big data is gaining traction and the Brightree acquisition is adding to margin gains and cross-selling opportunities. Expecting a solid result. 
  • Domino's Pizza Enterprises (DMP) – Should be a strong result above guidance but in line with consensus. DMP will issue FY17 guidance and while the market is already factoring in +35% growth, we note DMP's consistent conservatism in setting guidance.
  • Vita Group Limited (VTG) – Strong earnings momentum and a track record of execution support a solid result. We think there is upside surprise potential to consensus forecasts from any read-through the result gives on traction in the Small-to-Medium Business (SMB) segment.

More information

Morgans clients can access our full list of Reporting season Hit and Miss candidates. If you would like more information, please contact your adviser or nearest Morgans office

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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