Companies are reporting strong earnings, yet stocks are tumbling – Why?

The S&P/ASX 200 is trading at the most expensive levels in almost four years and well above historical averages. This elevated valuation leaves little room for error during this reporting season, and even companies that have exceeded market expectations are struggling to deliver substantial upside.

The market's 12-month forward price-to-earnings (P/E) ratio has surged to 17.97, driven by soaring valuations and weak earnings growth from key sectors like banks and miners. The forward P/E is now trading at a 9.6% premium to its historical average and up more than 20% since the beginning of 2023.

S&P/ASX 200 12-month forward price-to-earnings ratio (Source: Factset, Morgans)

Valuation in focus

The playbook for reporting season is pretty straightforward – companies that report a clean earnings beat across revenue, net profit, dividend and guidance will see their share prices rally.

Over the past 16 reporting seasons (2008-2024), companies that beat expectations delivered an average rally of 5.2% on the day of the result, according to Bell Potter's Richard Coppleson.

But this time round, the market is more interested in the price tag.

Investors dump JB Hi-Fi

JB Hi-Fi reported its first-half FY25 results on Monday, 10 February, delivering strong results across most key metrics:

• Sales up 9.8% to $5.67 billion vs. $5.52 billion consensus (2.6% beat)

• Gross margins of 21.8% vs. UBS estimates of 22.2% (180 bp miss)

• EBIT up 8.6% to $419.9 million vs. $409 million consensus (2.7% beat)

• NPAT up 8.0% to $285.4 million vs. $278.3 million consensus (2.5% beat)

• Interim dividend up 7.6% to 170 cents per share vs. 166.5 cents consensus (2.1% beat)

Gross margins missed expectations due to competitor activity, sales mix and promotions. However, the rest of the results were 2-3% ahead of analyst forecasts.

Following the report, JB Hi-Fi shares initially rallied 5.5% in early trade but ended the session 4.5% lower, reflecting significant selling pressure as investors took profits after the retail stock’s strong performance.

Prior to the result, JB Hi-Fi shares had rallied 75% in the past twelve months and trading at a PE ratio of 25x compared to 17x just six months ago.

Six months ago, JB Hi-Fi reported a similar earnings beat, but was rewarded with a major re-rate. On 12 August 2024, the company reported a 16.4% decline in FY25 net profit to $438.8 million, which was 3.7% ahead of consensus. During this session, the stock opened 5.9% higher and finished the session 8.3% higher.

More growth is needed

Breville reported a similar earnings beat and demonstrated effective management, with initiatives addressing potential US trade tariffs and exploring new growth opportunities.

The key numbers from its first-half FY25 include:

• Group revenue up 10.1% to $997.5 million (0.7% ahead of consensus)

• Underlying EBITDA up 11.5% to $177.6 million (1.3% beat)

• NPAT up 16.1% to $97.5 million (0.9% beat)

• Interim dividend up 12.5% to 18 cents per share (2.1% miss)

• Guided to FY25 EBIT growth of 5-10% (consensus is expecting 10%)

“We made the tactical call to pull approximately $60 million of second half 2025 inventory into the US a bit earlier than normal as a hedge against potential US tariffs," noted CEO Jim Clayton.

The result also highlighted the company progressing a direct model in China and the Middle East, and the massive growth runway for the company's new coffee subscription business, Beanz, which has shipped over 1.3 million bags of coffee since 2021.

Despite the slight revenue and earnings beat, Breville shares opened 4.3% lower on Tuesday.

The downward driver was once again – the stock's price tag. Breville is trading at a PE ratio of around 45x compared to 33x a year ago and the highest since December 2021. up from 33x a year ago, marking the highest level since December 2021. This higher PE ratio indicates that the share price has outpaced earnings growth. While this is sustainable for now, at some point, earnings will need to catch up — or the share price may face a correction.

Interestingly, Breville shares dipped as much as 5.7% but managed to finish the Tuesday session down just 1.9%. This highlights the tug-of-war between what is otherwise a strong result and high-quality company but an expensive valuation.

The bottom line

Companies are facing a high bar this February reporting season, and even those exceeding market expectations are struggling to find upside. While we're still early in the season, investors should tread carefully with expensive stocks and closely scrutinise even the strongest results.