Reporting Season Scorecard: A decent start

About the author:

Andrew Tang
Author name:
By Andrew Tang
Job title:
Analyst - Equity Strategy
Date posted:
17 August 2020, 3:20 PM
Sectors Covered:
Equity Strategy and Quant

Reporting season kicked off in earnest last week with ~13% of the ASX 300 reporting results. The low bar for earnings was clearly evident with the bulk of companies reporting either inline or above (low) expectations despite median reported FY20 EPS growth coming in at -9%.

Reporting Season Scorecard

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Early reporters show that investors have a clear preference for cyclicals that have been hit hard by COVID-19 and the magnitude of EPS upgrades reflect the overly negative forecasts heading into the results.

Cyclicals typically outperform in the recovery phase of an economic cycle and we expect this trend to continue as investors turn their attention to what earnings could look like post-COVID-19.

Some early trends and observations

  • Sector rotation and investor appetite for value – At this early stage earnings appear to be generally tracking ahead of some very depressed expectations. Better than anticipated trading conditions and guidance especially in COVID hit cyclical segments of the market (chemicals, media, retail, travel) has resulted in some sharp reactions to updates (ALQ, IPL, JHX, BSL, SWM, FLT + most retailers).
  • A few high flyers coming up short – outlook uncertainty has brought a few growth names back down to earth BRG (-8.4%), SEK (-8.6%), RMD (-7.4%), while others are doing just doing enough to appease holders REA (1.9%), XRO (0.5%). Some signs of fatigue are showing up in the High PE/Growth segment which does not bode well for stocks that are going into their results with elevated expectations and valuations (BNPL, NAN, COH, CSL).
  • Pre-reporting performance a strong predictor of the result day outcome – stocks performing well in August set the stage for the result. Early trading updates, and a better than expected activity is a theme that followed into the results.

Watch

At this early stage, earnings appear to be generally tracking ahead of some very depressed expectations so it would appear equity markets may not be as dislocated from reality as many have been suggesting.

Instead, markets are looking forward to FY21, a year when operating leverage could surprise to the upside even more than in a typical recovery.

Companies are learning to do more with less meanwhile the government has extended many of the generous benefits well into FY21 which could further support the recovery.

We think the earnings surprises will be greatest from the parts of the market with the most leverage to the economic recovery. While we think the market has it right directionally, we think the best opportunities from here are likely to be those stocks that have higher operational linkages to economic activity and low expectations.

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