What does February reporting season hold for investors?

Reporting season is underway and it can be a roller coaster ride for bewildered investors.

This week we have seen Ansell shock the market with a 28% profit downgrade, plunging the share price by 13%. On the same day, ARB Corp, delighted investors with a trading update that sales revenue lifted by 26.5% on the back of demand for its four-wheel drive parts and accessories. ARB's share price climbed by almost 7%.

For the 6.6 million Australian share investors, it is best not to panic when the results come out in reporting season but pay attention to what is going on with the company.

You don't want to make the wrong trading decision as it is easy to misinterpret profit announcements. Look at your private broker's or online broker's view of the results and what the market expects.

How the announcement compares to expectations is what matters. A profit increase that falls short of expectations can be a disappointment to the market.

The other thing to focus on is any commentary provided by the company about trading conditions, which may reinforce, or contradict the earnings announcement. COVID has created distortions in the business environment which may mean reactions to aberrant results are more forgiving.

While some share prices rise and fall on the news - often fairly quickly after it is announced - most likely the market has anticipated the result and it is already factored into the share price. In the lead up to the results' announcement is the pre-reporting 'confession season' when companies come clean about their earnings before they release them. This is a bigger deal for the full-year results.

Over February most listed companies on the ASX detail how they have fared over the past six months and importantly the company's outlook for the coming six months.

"People are more worried about the company's outlook, particularly any slowing growth," says Tribeca's portfolio manager Simon Brown. He says company outlooks for the next six months could be cautious given the uncertainty of the federal election and the spectre of higher interest rates and inflation.

Investment managers such as Brown believe the Australian economy and consumer activity have been reasonably strong over the six months until the end of December 2021, despite the disruption caused by the lockdown last year, the Omicron wave and supply chain disruptions.

Consumer spending is buoyant from high levels of saving and government financial support. This has flowed through to some retailers in the lead up to the key Christmas selling period as well as big sale days such as Cyber Monday and Black Friday, says Brown. Others have been impacted by forced store closures and a lack of staff because of COVID infections.

Which sectors will report strong results?

Max Cappetta, CEO of Redpoint Investment Management is expecting positive earnings potential and valuation support in the materials sector for companies such as BlueScope Steel (half year) and Nickel Mines (full year). Cappetta said both should see improved revenues delivering higher profits.

"Supermarket retailers have also continued to benefit from a 'closer to home consumer' and we have been pleased to see resilience in the supply chains for companies such as Metcash versus their larger peers at Coles and Woolworths," says Cappetta.

Metcash has an April year-end and will announce their earnings in June while Coles and Woolworths will provide their half-year updates in the second half of February.

Brown likes real estate companies that have profited from the property boom. Groups such as REA and Domain are expected to have had a strong last six months.

He also likes Tabcorp, ahead of the demerger when it splits into two groups. Also, Seek which is tied to the strong labour market.

COVID has taken a toll on some companies such as travel and leisure firms as Omicron led consumers to stay home over recent months.

"Travel-related firms such as Flight Centre, Webjet, Corporate Travel and Qantas are firmly within this camp," says Cappetta.

"Investors will need to see material improvements in movements and bookings before having confidence that profitability can be restored," he says.

Also, casino group Star Entertainment and toll road operator Transurban will be similarly impacted.

Corporate activity will override operating outcomes at some companies within this group, says Cappetta.  "Crown is currently under takeover from Blackstone and Sydney Airport is just days away from being removed from the ASX once its takeover is also completed."

Dividends

Dividends are back in vogue, explains Brown. "We are coming off a period when dividends were suspended."

Tom Sartor, senior analyst with stockbroker, Morgans, says that dividends surprised strongly last August, with mining profits pushing up market expectations back to above pre-pandemic levels.

"Heavyweight financials and resources remain our key picks to deliver bumper dividends for investors," explains Sartor.

Morgans' picks for dividend upside include BHP, South32 and Medibank.

Get stories like this in our newsletters.