Reporting season winners and losers
Australian company share prices can either go down in flames or up in lights in the Australian share market corporate reporting season.
Every reporting season produces heroes and zeroes, so let's take a look at five winners and five losers for this season to understand where these stocks are headed.
Let's start with the five losers to conclude on a high note.
Reporting season losers
1. Temple and Webster (ASX: TPW)
On February 14, TPW announced revenue had fallen by around 12%% to approximately $207 million and net profit after tax was down 47% for the six months to December 31. The stock opened down by around 7% and closed the day 27% below the prior days open.
The Australian Bureau of Statistics announced retail sales in Australia were down 3.9% for the December quarter and the market expects higher interest rates will see retail sales continue to fall.
TPW's share price has been falling since September 2021 and the recent fall indicates that the share price is likely to continue lower in the short term. Often the long declines exhaust just after the worst news is known. Although now's not the time to be holding TPW, the company is cashed up and confident about returning to much stronger revenues so it's a matter of waiting for a safer time to invest. I would prefer to see the share price rise back above $3.80 before considering this stock.
2. Fortescue Metals Group (ASX: FMG)
When Fortescue Metals Group (FMG) reported the CEO reminded shareholders of the company's record as one of the highest-returning ASX investments for more than 20 years. This is, right before the company released a first-half profit to December 31 of $2.4 billion, down by around 15%. FMG's fully franked dividend dropped to seventy-five cents per share and this news was not a surprise but the market does not like companies cutting dividends.
It is true that FMG is a great company in a boom, but in a downturn the share price is more likely to experience extremes in volatility. For example, in the GFC FMG fell by around 90% and in the mining downturn from 2011 to 2016 they fell by around 80%. This illustrates how FMG is not a defensive investment and therefore it is more important for investors to carefully time their decisions to buy.
Although at the time of reporting FMG's share price fell slightly and the market seemed to shrug off the news, when FMG went ex-dividend, it fell significantly more than the dividend amount, which often indicates a further fall in the share price is likely. Short-term risk is to the downside which simply means be patient.
3. Qantas Airways Ltd (ASX:QAN)
QAN CEO Allen Joyce and his team have done an amazing job. The airline announced an underlying net profit of $1.43 billion compared with a loss in the prior year of $1.28 billion. The record profit result eclipsed the previous company record in 2018. Statutory net profit after tax came in at $1 billion. Not bad for a company that had to ground its entire international fleet in the pandemic. The company also announced a buyback to keep shareholders happy of up to $500 million. But is this as good as it gets for QAN shareholders?
Competition has fallen for Qantas locally and there does not seem to be significant pressure on Qantas yet to drop prices, however, eventually this will occur. For now, many Australians are appreciating the freedom they have and seem willing to pay which is good for QAN's bottom line.
QAN shares fell by around 7% on the day of the announcement which can often occur following a record result. In the short term, there may be a rough landing for the share price. Investors need to bear in mind Warren Buffett's saying buy in doom and sell in boom and airlines are generally risky investments.
4. The a2 Milk Company Ltd (ASX:A2M)
It appeared A2M presented a glowing report with revenue up by 18.6% for the half year to December 31, 2022. Sales were up 43.5% for its China infant formula which boosted total infant formula sales growth to 18%. A2M also reported a 22% increase in net profit after tax to NZ$68.5 million. The return on cash boosted the result by NZ$12.1 million. So, what was it that upset the market?
It was A2M's lower forecast for revenue growth that disappointed the market. The company's share price fell by around 8.6% on the day and continued lower. Also weighing on the share price is the risk associated with the pending Class action.
The analysis indicates that A2M may fall by a further 10% in coming weeks to exhaust the sellers. Investors are wise to watch for a safer time to invest.
5. Harvey Norman Ltd (ASX:HVN)
HVN reported its results on February 28, 2023 and at first glance it stated EBITDA up 56.6%, NPAT up 71%. But the devil is in the detail. When I looked more closely at the results, I realised that what I was reading was a comparison of the first half of 2020 compared to the first half of 2023.
This round HVN's profit had actually fallen when compared to the same time last year by around 15%, which explains why the share price fell.
Now HVN is a great company, but it is heading south for a while and until it starts heading in the right direction investors should steer clear. What was exciting about the report is how the property revaluations have gone through the roof in 2022. For years the big institutions have tried to get Gerry Harvey to carve up the company and spin off these assets. The perception is that retail stocks will begin to feel the effects of consecutive interest rate rises, and this has not fully materialised therefore we suggest investors wait for the dust to settle.
Reporting season winners
1. Telstra Corporation Ltd (ASX: TLS)
For Telstra Corporation (TLS) the good news continues with NPAT up 25.7%, EPS up 27%s and further good news for shareholders is the dividend has been raised to 8.5 cents per share. CEO Vicky Brady is optimistic about Telstra's growth plans and the T25 strategy has provided clarity for the market. We expected Telstra to transform its business and investor opinion, and we think the company is on the right track.
Telstra's share price has struggled to hold above $4.10 since mid-2021, however, this recent result saw the stock break above this level again. This time we expect the share price to eventually move up on a whole new trajectory. In the short term we may see TLS's share price pull back to between $4 and $4.10, however, any move down is likely to be temporary, prior to the next significant rise towards $5. We are very positive about Telstra, the company is moving into a growth phase and is a good stock for medium to long-term investors.
2. Sonic Healthcare Ltd (ASX: SHL)
Many SHL investors would be scratching their heads wondering what just happened. Revenue fell by around 14% to $4.082 billion and net profit fell 54% to $382 million and yet SHL's share price jumped higher following the release of their result.
Perhaps the rise was driven by the financial industry's renewed interest in the Health Care sector or the promise of a higher dividend. SHL reported their fully franked dividend would rise by 5%. Perhaps the industry was pleased that the dividend was not going to fall. Although net profit fell 54% for the six months to December 31, 2022, it was reportedly higher by 50% when compared with the first half of financial year 2020.
Bear in mind that although SHL's share price rose 14% it had fallen by around 40% from its high in December 2021 to the low in February, just prior to the announcement. SHL is a good company, however, it is way too early to jump into this stock and investors are wise to wait for further confirmation that the rise is sustainable in case this is a sucker's rally.
3. Ampol Ltd (ASX: ORG) -15.46%
ALD reported record fuel sales and revenue well above expectations. Statutory net profit was up around 42% to around $795.9 million. But reporting season is all about expectations. When a company disappoints the market share prices can fall heavily, however, Morningstar analysts expected the profit result to be closer to $700 million while other analysts set a target of around $860 million. Of course, analysts can be wrong. On top of this, the dividend payout was strong with ALD promising to pay an additional special dividend of $0.50 on top of the fully franked dividend of $1.05 per share.
The market liked the announcement and ALD's prospects. ALD's share price gapped up 3.4% to $32.90 before pulling back, however, since ALD has eclipsed this price trading to $33.18 the following week. I can share that current analysis indicates a significant price hurdle lies just above at around $35, however, a strong rise above this level would indicate ALD will soon trade to a new all-time high.
4. Suncorp (ASX: SUN)
A string of natural disasters have wreaked havoc for insurers and this has suppressed the share prices of many insurance companies including SUN, so it was great to see the company report a 44.3% increase in profit to $560 million and the dividend is up a whopping 43.5% to $0.33 per share.
SUN is a diversified financial services business with its banking business contributing to a great result. SUN stated that Suncorp's home lending was up $2.6 billion for the half year to December 31, 2022 and its net interest margin was up 2.03%. Remember insurance stocks can be risky for investors and therefore it is unwise to buy and hold these shares. Although in coming weeks SUN may pull back temporarily, the stock has the potential to rise to between $14 and $15 in the short term.
5. Brambles (ASX: BXB)
BXB reported to the market on February 24, 2023 and I it wasn't just the result that appealed, I really appreciated the format of their ASX and media release. BXB's sales revenue increased 14% and underlying profit excluding extraordinary items was up 16%.
BXB lifted the dividend by 14% to US$0.1225 cents per share. The market liked the forward forecast for underlying profit of between 15% and 18% as the stock gapped up by around 3.7% to $12.52 on the day of the release and continued above $13.
BXB has struggled to justify a higher share price valuation for some time. In 2007 the stock traded to a high of $13.74 and has attempted to break above this level on a number of occasions; in 2016, 2019, 2020, 2022 and is now poised to break through. We believe the price will go to a new all-time high this year, however, BXB is a risky stock to own, and it may pull back again in the short term. This is not a stock for the faint hearted.
Key takeaways
Overall, this reporting season was good for the Australian market. I believe that good performers generally rise to the top in reporting season, however, this is a time when company results can be confusing for investors. We are often asked why a company's share price has fallen when they had a good result. If you just remember that the market factors in what is known six months in advance and its all about the forecast what you see occur will make more sense.
So, investors are wise to remember not to buy a stock based on results, which may seem contrary to what you ought to do but before you buy check that the share price is actually moving in line with earnings. The exception to this is when the bull market is in full swing and then most stocks will rise on euphoria. I'd like to add that most companies are being rewarded for increasing dividends and share prices will generally fall when dividends are cut.
Currently, reporting season has supported my outlook for the Australian market which is bullish and I expect most stocks that fell when they reported their financial results for the first half to the December 31 to recover. Stock prices are far more resilient in this next phase of the market's cycle so be prepared to buy some great opportunities using solid rules as the Australian market is likely to trade a new high in 2023.
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