Reporting Season is over. In the dust, here’s three stocks Goldman Sachs is bullish on

The Australian 1HFY23 reporting season has wrapped up, and it was an interesting year for the biannual flurry of accounts. This year, companies that missed earnings were punished by shareholders with an intensity not seen since 2016. 

“What is interesting this season is the outsized drawdown in share price reaction to earnings misses and/or outlook disappointment,” Morgan Stanley analysts wrote earlier in February. 

Reporting Season skewed to downside

 “Earnings misses [vs. internal estimates] have been punished more than 2x the average – the worst since the August 2016 reporting season, analysts added.

That’s a shame, given that multiple brokers state the 1HFY23 reporting season was skewed to the downside. 

That same effect carried across to forward-looking guidance estimates, too. All in all, the sellers were at the helm of sentiment. 

But it’s not all bad news 

Goldman Sachs published a series of notes outlining its preferences for three stocks on Wednesday. The investment bank has given the following three stocks a BUY rating after its analysts absorbed the details of some of the final earnings calls of the season.. 

Let’s take a look at which companies the investment bank is bullish on, and why. 

NEXTDC (ASX: NXT)

• Goldman Sachs has rated the ASX-listed data centre provider  a BUY, giving the stock a price target of $13.30. 

• Using a close price of $10.27, that reflects upside of 29.5%. As at 10:45am (AEST) Wednesday 1 March, the price is currently $10.55.

Keep in mind, GS analysts revised downward their second-half FY23 Earnings Before Interest Tax Depreciation Amortisation (EBITDA) estimates by -1%. The stock actually posted an unexpected loss on Tuesday. 

“NXT guidance implies an acceleration in 2H23 revenue, but a sequential decline in EBITDA…the key driver is increased land holding costs from [two data centres in Melbourne and Sydney] M4/S5 (c.$8mn p.a.) alongside a step up in CY23 power costs.” 

An explanatory note: NEXTDC names its data centres with the first letter of the city they are located in, followed by a number. M4 is the fourth Melbourne data centre, and S5 is the fifth for Sydney. 

“Although contracted growth was marginally softer than GSe, NXT clearly expects to sign meaningful new contracts imminently, and has accelerated 10MW of S3 capacity,” analysts wrote. 

Offsetting a slight EBITDA forecast downgrade, the team are cautiously confident that “another wave of strong contract demand has commenced.” 

“We believe this view is supported by NXT decision to acquire c.$220mn of additional land in premium SYD/MEL locations. However given this land acquisition, the significant development pipeline, alongside an update on Asia expected later in 2H23, NXT’s balance sheet will remain in focus. “

NXT one year performance chart

Harvey Norman Holdings (ASX: HVN)

• The bank has rated the home goods retailer as a BUY, giving the stock a price target of $4.70. 

• Using a closing price of $3.85, that reflects upside of 22.1%. As at 10:45am (AEST) Wednesday 1 March, the price is currently $3.77. 

While Harvey Norman’s first halfFY23 report missed Goldman Sachs’ internal expectations on revenue and profits, the bank is still keen to keep HVN in its portfolio. 

This comes even as Goldmans expects further sales decline, of as much as -10.7%, through the second half of FY23. The bank has also trimmed its revenue and earnings expectations by 4.7% across  FY23, FY24, and FY25.However, higher rental incomes for the company, as well as confidence on its ongoing Malaysian expansion strategy, have made Goldman Sachs take a closer look. 

“HVN’s property results were above expectations in 1H23 and expected to remain buoyant as rental income shifts higher. Property continues to provide effective partial hedge against softening trading conditions,” analysts wrote.

GS calculates that property represents 70% of HVN’s market cap, explaining its willingness to see sales revenues drop. 

“Management also continues to be upbeat on its international expansion strategy, reiterating 80 stores in Malaysia by 2028.” 

HVN one year performance chart

Fineos Corp (ASX: FCL)

• GS rated the insurance sector software specialist as a BUY and gave Fineos a price target of $1.95.

• Using a closing price of $1.35, this reflects upside of 44.4%. In the late first hour of trade on Wednesday 1 March, the price is $1.29. 

Like NXT and HVN, FCL might not be the most obvious first pick. 

“FCL’s 1H23 result missed on both revenue and GP. FY23 revenue guidance was reduced by around8% driven by a change in agreement with a major customer to co-invest in FCL’s platform over two-years,rather than pay for customised Services upfront,” analysts wrote. 

“While this has reduced near-term low-margin Services revenue, this should help FCL grow high-margin Subscription revenue with this customer over time in addition to being able to sell platform enhancements to other customers.” 

GS noted Fineos’s strategy to accelerate its shift towards a scalable cloud-based platform model on a recurring payment subscription basis (think Software-as-a-Service, also known as SaaS). 

While the shift towards this style of revenue generation has hurt the headline results of FCL’s 1HFY23 report, GS predicts it will bring dividends in the future (figuratively speaking). 

But still, GS downgraded its gross profit estimates for Fineos’s full FY23 by -8%. Though with 44% upside on its price target, Goldman Sachs is clearly bullish on buying the dip.

FCL one year performance chart