Analysts weigh in on Australian reporting season

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Given data earlier this morning showing Australian companies’ operating profits grew at their quickest quarterly pace since 2001, it makes sense equities analysts have given Australian reporting season a thumbs up.

The almost-complete February reporting season covers company results for the six months ended December 31. Most notably, conditions for commodities companies are much better than they were a year ago, when prices for iron ore, coal, oil and so on were at multi-year lows.

What proved a burden for the February reporting season in 2016 has now turned into boost. The benchmark S&P/ASX 200 is up 1.8 per cent so far this month and recently hit its highest level since May 2015.

Hasan Tevfik, Credit Suisse’s Sydney-based strategist – who FastFT is pretty sure was present at a recent Guns ‘n’ Roses concert in the Harbour City – said in a note today this reporting season was the strongest since 2010. He said:

Analysts upgraded their ASX 200 EPS forecasts by 1.4%. This time last year they downgraded by more than 2%. Yes the upgrades were concentrated in Commodities, but there seems to be early signs that the earnings expansion is spreading elsewhere.

Mr Tevfik continued:

Perhaps the most encouraging observation during the interim results period was not the EPS or DPS upgrades, it was companies resisting the obvious temptation to invest. While management guided to stronger sales, they also guided to lower capex. This is unusual. In fact it hasn’t happened in the last 10 years. This time last year Australia Inc. was told by investors they need to be more conservative in allocating capital, they need to be more frugal with their expenses, they need to think hard if expansion makes sense.

Stephen Ye and his colleagues at Morgan Stanley were also relatively upbeat, noting there were more companies delivering “beats” on earnings per share and revenue than “misses”.

They have crunched the data and found that the market response has been cautious. This year, stocks that have meaningfully beat estimates “have tended to be sold down relative to the benchmark after the initial result-day outperformance” as investors exhibit a preference to “take profits”.

Historically, stocks that beat the market overall have tended to show outperformance of around 3 per cent to 4 per cent up to 10 trading days after the day of the result, and vice versa, Morgan Stanley said.

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