Ratio of ASX-listed stocks deemed financially sound down -16%: Lincoln Indicators

Based on number crunching undertaken for Market Index by stock analysts, Lincoln Indicators, the rising interest environment, courtesy of spiralling inflation has had the biggest material impact on the financial health of ASX-listed stocks in consumer durables and apparel space.

Based on the analyst’s assessment of listed stocks over five categories - from strong, and satisfactory through to early warning marginal and distressed - the percentage of stocks in the consumer durables and apparel space deemed to be ‘strong to satisfactory’ has fallen -32% from 53% in August 2021 to 21% a year later.

Retailers under fire

Unsurprisingly, in light of these numbers, the ASX 200 Consumer Discretionary Index which comprises a swag of retailers is down -18.25% over one year.

Other sectors to experience double-digit deterioration in the financial quality of their underlying stocks were:

• Utilities: Percentage deemed strong/satisfactory down -17% to 29%

• Commercial and property services: Percentage deemed strong/satisfactory down -16% to 16%

• Transportation: Percentage deemed strong/satisfactory down -11 to 47%

• Diversified financials: Percentage deemed strong/satisfactory down -11% to 43%

• Real estate: Percentage deemed strong/satisfactory down -11% to 66%

• Food and staples retailing: Percentage deemed strong/satisfactory down -10% to 57%

Overall, while the number of stocks deemed financially strong has deteriorated -16% to 20%, the percentage of companies deemed marginal or distressed have fallen by -2% respectively.

Sector specific

Drilling down into the minutiae of detail, Lincoln Indicators data suggests the highest ratio of stocks with financials deemed less than satisfactory are in:

• Pharmaceuticals, Biotechnology & Life Sciences: 91%

• Software and services: 80%

• Retailing: 49%

• Food and stable retailing: 43%

• Technology Hardware & Equipment: 90%

• Materials: 87%

• Energy: 85%

• Food beverage and tobacco: 72%

• Diversified financials: 57%

• Commercial and professional services: 84%

• Transportation: 53%

• Telco services: 50%

• Utilities: 71%

Most distressed

Sectors where the percentage of stocks trading in 'distress' is greater than 50% include:

• Household & Personal Products: 58%

• Pharmaceuticals, Biotechnology & Life Sciences: 53%

• Semiconductors & Semiconductor Equipment: 67%

• Technology Hardware & Equipment: 57%

Six preferred stock picks

The six favoured stocks within the 400 ASX-listed stocks identified by Lincoln Indicators as “strong-rated” – based on modest gearing, strong operational cash flow from core earnings and other key financial criteria – include:

• A miner: BHP (ASX: BHP)

• A telco: Telstra (ASX: TLS)

• A retail chain: Lovisa Holdings Limited (ASX: LOV)

• A tech sock: Altium Limited (ASX: ALU)

• A private health insurer: Medibank Private Limited (ASX: MPL)

• A biotech stock: CSL Limited (ASX: CSL)

BHP Group: FY22 earnings per share (EPS) improved by 52% on the back of elevated coal prices and realised gains from asset divestments. Net debt decreased by circa $4bn, and operating cash flow was 28% higher on year. These factors enabled BHP to grow its full-year dividend by 8% in FY22 and should support the company in delivering a stable stream of dividend income.

Telstra: Despite headwinds from lower NBN receipts and covid disruptions, Telstra increased its dividends for the first time since 2015 on the back of the solid performance across its mobile division and cost-out program. The telco has guided earnings to be circa 8-9% higher in FY23 despite uncertainties surrounding current macroeconomic challenges. Hence, the market is confident in the telco's dividend sustainability.

Lovisa Holdings: Delivered a 116% growth in net profit after tax in FY22, driven by the easing of lockdown restrictions in second half FY22, global expansions, and price increases in response to inflationary pressures. Although the retailer did not provide earnings guidance, the trading update for the first seven weeks of FY23 was positive, and the company’s global store rollout strategy should continue to sustain earnings growth.

Altium: Expanded its net profit after tax by 57%, primarily driven by a lift in the number of subscribers, higher average subscription price and new software releases. The positive performance of the cloud division in FY22 should also continue to sustain growth, as management guided revenue to be 15-20% higher despite inflationary pressures and rising interest rates.

Medibank Private: Policyholder growth and robust cost control lifted insurance profit higher by 12.5%, enabled the insurer to deliver a 9% growth in earnings per share (EPS) and, consequently, a 5.5% increase in dividends payment. Dividends appear sustainable as management expects policyholder growth to continue in FY23, while net claims expenses are anticipated to be in line with FY22, excluding inflation.

CSL Limited: Revenue rose 12% due to solid demand for seasonal influenza vaccines and favourable exchange rates. The company also delivered a healthy return on equity at around 20% despite a capital raise to acquire Vifor Pharma in 1H22. In addition, CSL expects earnings to grow by 8% in FY23 resulting from a sustained recovery in plasma collection. Hence, the market is confident in CSL’s growth profile.

Source: Lincoln Indicators