Five stocks to buy out of earnings season

The February half-year results reporting season – which is full-year reporting season for that minority of companies that use the calendar year as their financial year – is almost complete, and the big takeaway is that the fears held by the market about the effect of Delta/Omicron, rising costs and supply-chain concerns – while certainly apparent in results – may have been over-stated.

In general, the half-year results were mostly better than expected, with market consensus expectations exceeded in many cases. In turn, that has led to upgraded profit expectations for the June 30 full-year – giving the market something positive to focus on, instead of the deteriorating geopolitical situation.

One of the best handles on profit-reporting trends is kept by Shane Oliver, head of investment strategy and chief economist at AMP. This season, Oliver says that 64% of companies reported profit increases compared to a year ago, while 43% of results beat market expectations, compared to 31% that “missed”. That win for “beats” was by a “narrower than normal margin,” he says. 54% of companies have raised their dividends, which is less than the reporting-season average of 59%.

However, the greater number of “beats” and the generally positive outlook has seen consensus earnings growth expectations for the current financial year revised upward by about 14% across the board – from expected growth of 13.1% prior to reporting season, to 14.9%, driven by energy, materials, financials and utilities.

Post-result forecast revisions by brokers have been just as positive, with 41% of stocks receiving upgrades versus only 23% with downgrades.

Financial data provider Refinitiv has moved to the US method of aggregating all earnings-per-share (EPS) estimates for the stocks in the S&P/ASX 200 index into one figure for the index: Refinitiv says consensus earnings forecasts for the year ahead for the index have risen by 6% in the past month to $439, which is more than 20% higher than a year ago, and is a record level.

All up, the Australian market appears poised to rack-up record earnings in the full-year reporting season later this year.

Here are five stocks that impressed during this reporting season, that I’d be happy to buy on the basis of their strong showing.

 

1. Goodman Group (GMG, $22.21)

Market capitalisation: $41.5bn

One-year total return: 34.3%

Three-year total return: 21.8% a year

Estimated FY23 yield: 1.5%, unfranked

Analysts’ consensus target price: $26.54 (Thomson Reuters, 12 analysts), $26.61 (FNArena, six analysts)

Source: nabtrade

 

Global industrial and logistics property manager Goodman Group reported an excellent half-year result, with a $2bn statutory profit (helped by a $1.5bn valuation gain) and at the operating level, operating profit lifting 28% to $786.2 million, while operating earnings per share rose 27 per cent to 41.9 cents. The good news was backed up with a second upgrade to full-year earnings guidance. Over the half-year, total assets under management rose 32% to $68.2bn, of which $64bn are held in investment partnerships.

Goodman’s development pipeline surged 51% to $12.7bn, across 81 projects around the world. Goodman is quite simply one of the ASX’s true global leaders, riding the wave of consumer demand for e-commerce by building warehouses in leading global cities in partnership with institutional investors and on behalf of customers such as Amazon, its largest customer. The company is not a great yield proposition, but the total return on offer looks attractive, in what investors can be fairly confident remains a growing market.

 

2. Woodside Petroleum (WPL, $27.95)

Market capitalisation: $27.1bn

Three-year total return: –3.5% a year

Estimated FY23 yield: 5.5% fully franked (grossed-up, 7.9%)

Analysts’ consensus target price: $30.23 (Thomson Reuters, 14 analysts), $28.78 (FNArena, five analysts)

Source: nabtrade

 

A week ago, I wrote that Santos was the stand-out oil and gas stock on the ASX, and I still think that, but Woodside’s result was very strong, and the stock also looks attractive. Woodside’s full-year 2021 result was its best for eight years, with the $US1.98bn ($2.75bn) net profit representing a $US6bn turnaround from the COVID-induced loss of $US4bn in 2020.

Virtually every number for 2021 was a beauty, with operating revenue up 93% to $US6.96bn; operating cash flow more than doubling to US$3.79bn; the realised price achieved surging 86% to $US60.30 per barrel-of-oil-equivalent (boe), while the unit production cost only increased by 10% to $US5.30 per boe; underlying net profit ballooning 262% to $US1.62bn; and the fully franked final dividend more than tripled, to 105 US cents.

By the end of June, Woodside will complete the merger with BHP Petroleum, which analysts see as a transformative deal that will vastly enhance Woodside’s fundamentals. In the meantime, the projected yield is very attractive on a grossed-up basis, and Woodside looks to be pretty good value.

 

3. Breville (BRG, $27.40)

Market capitalisation: $3.8bn

One-year total return: –2.5%

Three-year total return: 22.8% a year

Estimated FY23 yield: 1.3% fully franked (grossed-up, 1.9%)

Analysts’ consensus target price: $32.00 (Thomson Reuters, 10 analysts), $33.03 (FNArena, six analysts)

Source: nabtrade

 

Appliance manufacturer and marketer Breville Group was considered to be a canary in the coal mine in terms of supply chain constraints, increased freight costs and inflationary pressure, and while these showed up in its half-year result, sales surged 24% to $878.7 million and net profit rose by 25% to $77.7 million, and the interim dividend was lifted by 2 cents, or 15%, to 15 cents. Sales growth was strong everywhere, in constant-currency terms: up 17.1% in the Americas, up 39.4% in Europe, Middle East and Africa (EMEA), on the back of entry into new markets including France, Italy and Portugal; and up 22% in Asia-Pacific. As broker Morgans put it, “There are precious few indications that consumer demand for its products is falling away”.

However, Breville did say that it expects to raise the prices of some of its most popular products further in the second half – although it also said that the compact size of Breville appliances means container shipping price rises aren’t as expensive for it as for other companies.

Overall, Breville looks well-positioned to deliver double-digit sales growth consistently over the next few years as it continues to grow its market share, particularly in the countries where it has recently launched. BRG is also not a great yield story, but there looks to be a fair bit of value in the share price.

 

4. BHP (BHP, $45.59)

Market capitalisation: $320.6bn

One-year total return: 1.4%

Three-year total return: 14.2% a year

Estimated FY23 yield: 6.5% fully franked (grossed-up, 9.3%)

Analysts’ consensus target price: $49.21 (Thomson Reuters, 17 analysts), $46.14 (FNArena, seven analysts) 

Source: nabtrade

 

The Big Australian miner beat market expectations with an underlying half-year profit of $US9.7bn ($13.2bn) and its third record interim dividend in a row, a 49-US-cent increase to $US1.50 – almost three times the 55 US cents it paid two years ago. The result was achieved on the back of a 27% boost to revenue, to $US30.5bn.

The strong result was driven by strength in BHP’s most important business, iron ore, but also record prices for coking (steelmaking) coal and strong copper prices. BHP was upbeat about the outlook for the Chinese economy, saying it expected the headwinds that buffeted the company’s biggest customer over the past six months – such as electricity shortages – to ease in the year ahead.

BHP did warn investors that it was facing record “uncontrollable” costs and that it was coming under pronounced “industry-wide inflationary pressure”. But analysts are looking for strong earnings growth for the full-year – about two-thirds, in USD terms – and with BHP’s 9%-plus post-franking yield, the big miner looks good on total-return grounds.

 

5. SEEK (SEK, $26.92)

Market capitalisation: $9.5bn

One-year total return: 5%

Three-year total return: 18.2% a year

Estimated FY23 yield: 1.8% fully franked (grossed-up, 2.6%)

Analysts’ consensus target price: $33 (Thomson Reuters, 14 analysts), $33.97 (FNArena, five analysts)

Source: nabtrade 

 

Jobs website operator SEEK, which runs employment websites in Australia and seven Asian countries, had a great first half of the financial year, with revenue up 59% to $517 million, underlying net profit up 147% to $124 million and a fully franked interim dividend that was lifted by 10 cents to 23 cents a share, the highest payout for three years. SEEK boosted its full-year earnings guidance by about 23%, based on the mid-point of the new guidance range: it now expects FY22 revenue in the range of $1.05bn–$1.1bn, EBITDA (earnings before interest, tax, depreciation and amortisation) in the range of $490 million–$515 million, and net profit in the range of $230 million–$250 million.

SEEK told its shareholders that the business has the opportunity to double its revenue in its core business over the next five years if it” “executes well and markets are stable”.

Analysts expect full-year earnings per share (EPS) to almost double, to about 69 cents, with the dividend boosted by about 12%–15%, and healthy scope for the share price to rise.

 

 

All prices and analysis at 28 February 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.