There’s always a small chance that one of your holdings could report a disappointing result, leading to a sharp selloff followed by further declines in the days that follow. It’s a tough experience, filled with emotions, as you find yourself hoping, “Maybe it’ll bounce back if I step away from the screen for a bit.”
Unfortunately, missing earnings expectations is typically a bad sign for stocks. In the last 16 reporting seasons (2008-2024), stocks that missed expectations declined an average 6.3% on the day of reporting, according to data compiled by Bell Potter’s Richard Coppleson.
If you’re looking for a bounce – Think again. The same losers are down an average 8.4% four months later.
An earnings miss signals a fundamental issue within the business. It could be something that alters its near-term trajectory and earnings profile. This could be poor operational inefficiencies or inventory management, the loss of a key client, a permanent shift in customer preferences or a slowing growth pipeline.
Beyond the immediate disappointment, an earnings miss forces analysts to rejig their models to reflect the weaker-than-expected numbers. This leads to downward revisions in revenue, earnings, and possibly dividends. Lower assumptions then translate into a reduced share price target, and if the cut is significant, even a rating downgrade.
But averages and theory only tell part of the story. Let’s look at some real examples from the most recent August reporting season.
Aurizon (ASX: AZJ) is often referred to as a "defensive" stock because it operates in a sector that provides essential services (transportation and logistics), which are less susceptible to the ebb and flow of the economic cycle.
Given this status, the company should consistently meet market expectations. But this time round, it didn't.
Aurizon reported a slight miss (which is significant given the typically defensive and predictable nature of its business) due to higher depreciation and interest costs, along with weaker-than-expected FY25 profit guidance. The coal segment was a key drag, as rising operational costs eroded margins despite higher volumes.
Key highlights from the result include:
FY24 NPAT up 11% to $406 million (5.1% below Macquarie estimates)
Full-year dividend up 13% to 17 cents per share (2.2% miss)
FY25 EBITDA guidance of $1.66 billion to $1.74 billion (4.4% miss at midpoint)
The stock opened 4.9% lower on the day of the result (12 Aug) and finished the session down 8.8%. The result drove abnormal volumes, with 29.5 million shares trading hands vs. the stock's 20-day average of just 6.9 million shares (327% increase).
Post earnings, the average target price across 11 sell-side analysts was cut by 3.4% to $3.76. A few notable takeaways from various analysts include:
Macquarie: Caution prevails due to limited progress in growth segments, needing more consistent performance to boost confidence
UBS: Reduced dividend expectations have pressured sentiment, but valuation is fair given current performance.
Morgans: Cut earnings forecasts on rising costs and conservative growth expectations.
While Aurizon experienced a 6-7% bounce over the next three months, the stock is currently down 1.2% since the reporting day.
Cochlear (ASX: COH) reported a result that looked solid at first glance but fell short of analyst expectations. For a growth stock trading at a price-to-earnings ratio above 50, missing expectations is a significant setback.
Key highlights from the FY24 result include:
FY24 revenue up 15% to $2.25 billion (1.7% below Macquarie estimates and towards the lower end of its guidance)
Underlying net profit up 27% to $387 million (4.2% miss)
Full-year dividend up 24% to $4.10 per share (4.6% miss)
FY25 underlying net profit guidance between $410-430 million or a 6-11% increase in FY24 (8.9% miss at midpoint)
A significant focus was the slowdown in cochlear implant unit growth during the second half of FY24, which was primarily driven by delays in emerging market tenders and a reduction in paediatric activity.
The price action was relatively painful on all fronts.
Day of the result (15 Aug) – Shares down 7.5% (opened 5.0% lower)
The next day (16 Aug) – Shares down 2.3%
By year-end (19 Aug to 31 Dec) – Shares down 5.1%
Inghams (ASX: ING) saw one of the most dramatic selloffs after announcing a phased reduction in poultry volumes due to a new supply contract with Woolworths. These concerns were amplified by cost-of-living pressures and weaker demand for quick-service restaurants. The situation was further worsened by a weaker-than-expected FY24 result and disappointing FY25 guidance.
Underlying EBITDA up 30.8% to $240.1 million (3.3% below Macquarie estimates)
Underlying NPAT up 31.3% to $109.2 million (8.0% miss)
Total FY24 dividend of 20 cents per share (3.8% miss and at a higher payout ratio)
FY25 underlying EBITDA guidance of $246-250m or flat to 6% year-on-year growth (5.8% miss)
The price action was like Cochlear's - except it was far more dramatic.
Day of the result (23 Aug) – Shares down 20.1% (opened 9.5% lower)
Post result to low (25 Aug to 22 Oct) – Shares down 8.0%
By year-end (25 Aug to 31 Dec) – Shares up 2.9%
A sizeable earnings miss can take the life out of a stock – not only on the day of the result but for weeks, if not months to come. While I've only listed three examples, plenty of other large cap names from August reporting season come to mind.
Audinate (ASX: AD8)
Domain (ASX: DHG)
Jumbo Interactive (ASX: JIN)
John Lyng Group (ASX: JLG)
Lovisa (ASX: LOV)
McMillan Shakespeare (ASX: MMS)
Megaport (ASX: MP1)
PWR Holdings (ASX: PWH)
Ramsay Healthcare (ASX: RHC)
SmartGroup (ASX: SIQ)
The narrative behind all these stocks is relatively similar – the companies reported weaker-than-expected earnings (and/or guidance), the stocks sold off heavily on the day of the result and generally continued to trend lower. And the opportunity cost of holding onto a downtrending loser is certainly something I wouldn't want to live with.
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