Reporting season in focus: is value back?

Market insights

Macquarie Australian Equities
Tuesday 27 September 2016

The latest reporting season (August 2016) saw the ASX 200 fall 2.3% during the month. This relatively weak showing is partly explained by high market expectations of earnings heading into the season. As an example, only 28% of ASX 200 companies reporting came in above consensus earnings expectations, compared to the longer-term average of 40%. Longer term average based on 20 years reporting to August 2016.


Macquarie High Conviction Fund: Reporting season scorecard

In picking stocks for the Fund, we seek stocks that we believe are likely to meet or beat market expectations, and avoid those that we believe will miss earnings expectations.

We classify stocks that meet market expectations as those stocks which report actual earnings which are in line with consensus forecast earnings (with a 2% margin above or below). Those that beat consensus forecast earnings are those companies that report actual earnings which are more than 2% above consensus forecasts, and those that miss, report actual earnings that are more than 2% below consensus forecasts.

Over the last reporting period out of the 21 stocks in the Fund that reported earnings, 90% were in line or beat market expectations based on the above criteria

Macquarie High Conviction Fund: August Reporting Season Scorecard

Companies Reporting 21
Beat 7
In-line 12
Missed 2
Hit rate* 90%
*hit rate defined as (beat plus in-line)/total companies reporting

While a strong hit rate is a pleasing result for the team, we saw some interesting trends emerging in the Australian equity market. 3 key themes included; the re-emergence of value in a high PE market, the resilience of the domestic housing market and a mixed result from the Australian consumer sector.


1. Value versus Quality: Where are we in the cycle?

This reporting season quality companies that announced earnings that missed or were only in-line with expectations were dealt with relatively harshly. Aconex, Mantra Group and QBE delivered marginal results and guided to softer outlooks, which led to the stocks underperforming over the month.

Despite a range of disappointing results, in our view it is too early to call the end of the quality cycle. Demand for quality stocks remains, with REA Group, Carsales and Cochlear staging big intraday rallies post disappointing earnings announcements.

On the flip side of this trend, value companies were notably stronger in what has been a market environment favouring quality stocks. Cleanaway, Downer Group, Seven West Media and Ansell were all notable performers.

Cleanaway delivered strong results across all its divisions leading the company to beat FY16 consensus earnings expectations. Management remain confident they can continue to deliver permanent cost reductions across the business heading into FY17.


2. The Australian property market – the gift that keeps on giving

Residential developers and housing exposed consumer stocks performed well on the back of strong ongoing housing demand. With significant media attention on the apartment sales (particularly in Melbourne and Brisbane), Mirvac Group and Lend Lease performed strongly after reassuring the market that settlement of apartments remains strong. Both companies announced less than 1% defaults on contracts due for settlement in FY16.


3. The Australian Consumer – pockets of strength

The Australian consumer continues to be a fickle one! Pockets of strength are seen in housing related businesses and travel names, but offset by weakness in gaming and online housing listings.

Harvey Norman grew earnings by 23% in FY16. Management commented that the result was driven by housing related activities, with this trend continuing in the first eight trading weeks of FY17. Strong results were also seen in Fantastic Furniture and Nick Scali, both reporting double-digit earnings growth with their exposures in home furnishings.

Consumer discretionary continued to outperform in August, particularly travel names Webjet, Flight Centre and Corporate Travel Management. Outperformance was driven by a combination of company specific initiatives and improving industry conditions. While the weak pricing environment is negative for most travel names, an offsetting factor is improving demand, with domestic conditions further supported by continued inbound tourism.

However, pockets of weakness were seen in casino spending and housing listings. SKYCITY Entertainment Group delivered earnings below market expectations, commenting that main gaming floor revenues in their Adelaide local casino suffered from election and macro uncertainty.

Owners of real estate listing portals Realestate.com.au (REA Group) and Domain.com.au (owned by Fairfax Media), delivered strong results but commented on election uncertainty impacting listing volumes. Although yield on listings continues to grow, both commented that vendors were cautious to list during May/June, but expect a rebound in volumes later in the spring season.


Summary

We continue to believe there are a number of compelling opportunities in both value and growth stocks, for bottom-up stock pickers that know where to look.

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