Reality Bites - Henry Jennings' February Reporting Season wrap

Reporting season has come and gone, as if it was a dream. There was a deluge of numbers, commentary, analyst reports to consume. So much data and so little time. And then just like that it is over, and after the adrenaline rush wears off, you almost miss it. Almost. The thrills and spills of extreme volatility. We then have to sort through the wreckage and try to decipher what is happening at a company level and then the broader implications for the economy as a whole. Some are more forthcoming on the big picture than others.

Firstly, some general observations. The algos punished any company that disappointed. Instant reactions with some serious moves to the downside. Domino’s Pizza (DMP) was a case in point. The stock dropped 34% in February as a killer combo of higher input costs (more dough spent on dough), and the prices rises in stuffed crusts turning customers off, sent the stock reeling. And it wasn’t as if it was just an Australian or European issue, the head company in the US also tumbled, as the same issues befell them. I feel sorry for shareholders who stumped up $64.54 in the SPP and $66.38 for institutions in the book build. Think I would be feeling a little put out. You would have thought at Xmas they could have seen the issue coming. The market took no prisoners and no amount of ‘famous’ Don Meij charm could change the sentiment. Is Don? Not Good.

In fact, even something as prosaic as funerals with Invocare (IVC) took a battering as the country’s biggest provider of end -of -life services fell hard dropping nearly 20% in February. There are supposed to be two certainties in life and one of those seems to be not quite as profitable as before.  Margin pressures and cost of staff obviously hurt, plus the pre-paid business faced issues. More claims. 9% up on previous period. Again, no quarter given. Dust to dust. 

Equally there were knee jerk reactions higher. AP Eagers (APE) motored ahead after record results up around 18% on the results. It seems our appetite for new cars has not been diminished by rate rises or a housing slowdown. We are still prepared to wait 79 days on average for a Jimny. 

It did seem this was more of a Killing Season than normal.

The second observation was on big caps. The banking machine continues. Pull the handle and the money drops out BUT increased competition for a shrinking mortgage market is sending a warning sign that it could be ‘as good as it gets’. 

Then there are the big iron ore miners, which trimmed the generous dividends that some investors had assumed would last forever. Nothing does in cyclical stocks. The good news was that they have all remained disciplined in splashing the cash on value destroying acquisitions. Good for ego, bad for shareholders. BHP said it was seeing 12% inflation in its business. Other miners delayed spending plans and extended growth trajectories and talked about staffing issues and even weather.

Third observation is that things weren’t that bad in corporate Australia. Not great but not that bad yet. Retail is facing headwinds, Gerry Harvey asked shareholders to look at the property portfolio rather than the retail outlook. Never mind the quality, feel the width. Some problems there and even market darling JBH, was sold off on its positive results. That looming mortgage cliff was a dominant theme. 

In February, the ASX went backwards. Around 3% in the final analysis. Of some of the 241 corporate results we looked at in February, 31.5% beat expectations and nearly the same amount failed to meet those expectations. 39% were in line. Maybe we should flip it around and say that 39% of the time analysts got it right. 61% of the time they were just plain wrong!

Guidance was maintained at best. We saw few upgrades really and Price Targets (PT) on those 241 stocks have barely changed. Not much to get excited about then. According to one analyst February does not make us shiver, at least not compared to August reports. February 2022 and 2021 saw far more beats of 43% and 47%, but I guess a lot of that was Covid related or adjusted. Takes a while it seems for normal service to be resumed.

The three overriding factors that emerged was issues relating to higher rates, either from consumer spending or debt levels, resilience and response to ongoing inflation and margins, although that seemed to be abating and business as usual post Covid. 

Quality of management in large caps was especially evident with companies like Macquarie Group (MQG), Goodman Group (GMG) and CSL. 

It seems that the investment community lost patience with turnaround stories or ‘second half better things to come’ hopes. In an uncertain world, certainty and quality was rewarded. Jam today not jam tomorrow. 

Finally, what was to like? Quality management with resilient and diverse business models. Macquarie Group (MQG) remains a key holding for us. The consumer is not dead but just more discerning. Insurance is one area where it is almost compulsory and they are driving premium growth. Even Medibank Private (MPL) shrugged off cyber issues, proving that we are sticky customers. Should change their name to Public not Private, given all our data is now out there. QBE Insurance (QBE) surprised but this time to the upside. Telstra (TLS) showed the power of the mobile network. A seamless transition to a new CEO too, gives us confidence in this one. Buybacks helped and dividend increases despite uncertain outlooks. Maybe courageous.

On the dislike list, second half stories, turnarounds, management changes (sudden or otherwise) any report with ‘strategic review’ in it. Guidance being removed. Consumer facing stocks unless they have exposure to millennials like UNI. No mortgage pain for their customers. Margin compression and pent-up inflation without being able to pass it through to customers. 

Those expecting a problem child to come good have had hopes dashed. Appen (APX), EML Payments (EML), City Chic (CCX) to name a few. These have a long road back.

In conclusion, the ‘Killing Season’ lived up to expectations of being tricky.  Headwinds for many, resilience for some. Winners and losers. Challenges remain. Stick with quality management. Hope is not a strategy. All boats do not rise at once and only the best boats stay afloat when the tide goes out. 

Next up the Budget and interest rates to hold our attention. Always something to drive volatility.

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