Five top picks from the February reporting season
The February reporting season produced some notable performers, companies that are enjoying strong earnings growth and leveraging growth opportunities abroad that will help them to withstand an expected slowdown in the Australian economy.
Stockmarket darling, the a2 Milk Company, is one of our top picks. Despite fears that its earnings would suffer with a slowdown in the China economy, a2 Milk recorded earnings before interest, tax, depreciation and amortisation (EBITDA) and revenue growth of 41.6 per cent and 50.1 per cent, respectively, for the first half of fiscal 2019 compared to the same period in 2018.
The company's increased investment in brand, market development and organisational capability fuelled strong sales growth in all of its key product segments - infant formula, liquid milk and milk powders. Outside of China, it's now targeting the US for exports, where its distribution channels are quickly expanding.
At home, a2 posted Australian fresh milk revenue growth of 11.7 per cent and record market share of 10.8 per cent. While a2 shares are currently trading near a record high of $14.23 struck in February on its strong results, any dips could be seen by investors as a buying opportunity.
Another global company, Aristocrat Leisure, has affirmed its position as a monopoly market leader in gaming. The company recently reported net profit after tax and before amortisation (NPATA) of $729.6 million for the 2018 fiscal year ended September 30, 2018, jumping 34 per cent on the previous corresponding period.
Aristocrat has positioned itself for the explosion in online gaming, having bought Israeli gaming company Plarium and US casino gaming business Big Fish. These moves have dramatically increased its market share in the lucrative digital gaming industry. Aristocrat currently exports to around 100 countries, helping to sustain its growth.
While Aristocrat shares rallied in February, they are trading around $25, well down on their $33 record high struck in July 2018. This weakness and could be seen as a buying opportunity for a company that boasts a strong balance sheet and a market leading position.
We also view BlueScope very favourably. The company reported a net profit after tax (NPAT) for the first half of 2019 of $624.3 million, a 42 per cent jump over the previous corresponding period. Underlying earnings before interest and tax (EBIT) grew 62 per cent to $850 million, reflecting strong demand for steel in the Australian and US markets.
BlueScope is working on growth opportunities in India, New Zealand and Southeast Asia, as well as existing markets, which will provide continued growth across the second half of the 2019 financial year and beyond despite any possible slowdown in steel demand from China.
The possible expansion of BlueScope's successful North Star business could add significantly to its output, with the volume range refined to an additional 800,000 to 900,000 metric tonnes per annum of steelmaking capacity. The dip in BlueScope's share price since December could represent a buying opportunity.
In terms of the technology sector, technology company Appen reported a huge 119 per cent jump in revenue to $364.3 million for the year ended December 31, while its underlying EBITDA soared 153 per cent to $71.3 million. Appen's statutory net profit jumped 192 per cent to $41.7 million.
Appen shares jumped to a record high of $23.75 on the better-than-expected results, and are up 117 per cent over the year. We could see similarly strong growth ahead given the boom in artificial intelligence development and machine learning, for which Appen provides datasets. Its clients include Facebook, Apple and Microsoft, global heavyweights of the technology sector. However, investors should note that Appen's largest five clients account for a significant proportion, or 80 per cent, of its total revenue.
That said, Appen's history for surpassing market consensus and its ability to sustain strong earnings growth since its 2015 listing on the ASX make Appen an intriguing growth story and an ideal smaller capitalisation exposure for investors looking to take on a bit more risk in their portfolios.
Treasury Wine Estates is another of our top picks. The company recently reported net sales revenue growth of 16.4 per cent to $1.51 billion (on a constant currency basis) for the first half of the 2019 fiscal year, the strongest organic growth rate in the company's history.
Total Australian export sales surged 10 per cent to $2.82 billion in 2018. Exports to China soared 18 per cent to $1.14 billion. The removal of all tariffs on Australian wine exports into China from January 1, 2019 could see a further boom in exports ahead, delivering solid gains to shareholders.
Moreover, as the China-US trade war appears to dissipate, all of the above companies will benefit as their businesses are global and highly exposed to positive economic sentiment.