Reporting season: Earnings boost fund managers’ optimism

Reporting season: Earnings boost fund managers’ optimism

But while there were some notable profit downgrades last month, thebenchmark S&P/ASX 200 index also broadly recovered some of the losses made in the fourth quarter,when trade tensions, expectations of higher US interest rates and the royal commission into the financial sector sent stocks into a selling spiral.

“The mood of professional investors in reporting seasons tends to be directly proportional to the prevailing market backdrop,” said Ben Griffiths at Eley Griffiths.

“This time last year the market was aggressively selling off in step with a Wall Street meltdown and results were summarily dealt with, in the main. This year the market is rallying and responses to results have been measured to the downside, in the case of disappointing results, and ebullient in the case of strong reporting.”

Cleanaway Waste Management shot up more than 13 per centafter it released its results this week, while household appliances manufacturerBreville Group soared 18 per cent on the day it released its earnings.


“Breville Group,IDP Educationand Cleanaway reported and guided well and enjoyed extraordinary share-price reactions,” said Mr Griffiths.

“It is patently obvious that investors spent much of December quarter building cash levels in readiness for a continuing volatile stockmarket into 2019, when in fact a sharp equity rally has ensued.”Signs of economic stability emerged during the week, with the NAB business survey moving up to 7 index points.

Adding to signs of strength in consumer-exposed sectors, consumer electronics retailerJB Hi-Fi also gained this week after reporting earnings,jumping as much as 7 per cent on the day it delivered a surprise 5.5 per cent increase in first-half net profit to $160.1 million.

Miners and energy

Greg Bundy at Federation Asset Management has been watching the Australian-listed mining sector for signs that the lingering trade war between the United States and China is filtering through into corporate profits.

So far, the results in the mining sector have been “surprisingly good”, he said. “Despite the political fallout, it looks like China will continue to be a consumer of Australian resources.”

During the week, South32announced it would increase its returns to shareholders through a special dividendafter reporting a first-half profit of $US635 million ($895.7 million).

In the energy sector, Woodside Petroleum reported that net profit in the year ended December 31 rose 27.6 per cent to $US1.364 billion ($1.92 billion) from $US1.069 a year earlier.

And Beach Energy lifted its earnings guidance afterits $1.6 billion acquisition of Lattice Energylast year more than tripled in first-half profit and bettered analyst expectations.

“Australian corporations appear to have weathered the geopolitical scenarios out there and I’m more on the ‘pleasantly surprised’ side of upward revisions in earnings,” Mr Bundy added.

But not all companies were rewarded after revealing their earnings to the market.

Highly valued market darling CSL’s shares fell 3.9 per cent to $186.09 despitethe healthcare giant raising its interim dividend and saying its full-year net profit would be at the upper end of a $US1.88 billion to $US1.95 billion guidance range it set in August.

Mr Potter at Nikko noted that healthcare groupResmed also lost ground after reporting results, commenting that the firm was one of a basket of stocks that came in “hot” to reporting season.

“It recently had an incredible performance and the result wasn’t particularly bad, but it just wasn’t up to what the market was expecting and it corrected quite substantially,” he said.

Telstra, AMP

Some companies that have had a tough time over the past year saw further selling this week after posting their earnings numbers.

Telecom group Telstra, for example, dropped 2.2 per cent on Thursdayafter reporting that its net profit dropped 28 per cent at $1.23 billion in the first half.

Wealth manager AMP fell 7.8 per cent on the same day after deliveringnet profit for the year ended December 31 of $28 million, a 97 per cent decline from $848 million in the previous year.

“The usual rules apply: companies that meet [or] exceed market consensus trading on reasonable valuation multiples will fare well during reporting season,” said Mr Griffiths at Eley Griffiths.

Mr Potter at Nikko Asset Management said that, in his view, companies were not going to report huge growth. “But what’s been priced into some of these risk assets is a lot worse than the most reasonable outcome that we’re going to see. So I think that markets will re-rate,” he said.

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