Your winners & losers from reporting season so far (and some tips for week 5)

Eighty five percent of companies on a market cap basis have reported their FY23 results. And, as expected, they've been marked by volatility with less beats than misses (0.9x) relative to Morgan Stanley's estimates. 

Consumer discretionary, arguably the most cash rate sensitive sector, has been given a pass (of sorts) from investors, who have prioritised the FY25 recovery over FY24. Other sectors failed to impress, including healthcare, staples and tech, while an uncertain outlook in China has put a dampener on commodities. 

We'll be drawing on broker research from Macquarie and Morgan Stanley to etch out the key trends from this year's earnings season, and flag some of their trading tips as we kick off week five. 

Earnings guidance down

Earnings guidance is exactly that - guidance. But the market is pricing stocks on this guidance today, so it's hugely important. FY24 earnings have come out the oven worse than expected, and now sit at -5.7%. Things get a bit better in FY25, lifting to 5.5%, while FY26 comes in at 4.9%. 

Source: Morgan Stanley Research

When no news is good news

Macquarie analysts find a near 80% correlation between share price reactions and the guidance surprise relative to consensus expectations. 

However, as the graph below shows, the best returns came from companies that don't provide guidance as a matter of course. Among companies that do usually provide guidance, the market on average only responded positively to companies that guided growth of over 5%. Everything else resulted in negative returns. 

Source: Macquarie Research

Consumer discretionary gets a pass

The highly rate sensitive consumer discretionary sector is up 1.9% for the month, with many discretionary names rallying anywhere between 5 and 30%, as the market prices further out than normal.  

According to Macquarie, discretionary still has the most positive EPS surprise (41%) and the highest average post result returns (+2.4%). 

"There has been a mixed result reaction in broader discretionary stocks but where large positive moves have been seen it is clear that the market is looking through still challenged top line conditions and applying a hall pass of sorts to jump the cycle to FY25e earnings and multiples," adds Morgan Stanley. 

"This explains in part why Discretionary is the only sector up for the month to date (+1.2%)."

That said, Morgan Stanley pour some cold water on the bulls. 

"We are inclined to push back on the recent strength seen across cash rate- sensitive sectors, including recent moves in consumer-facing names. The adjustments the consumer is making are due to a cumulative build-up of interest rate and inflationary pressure. We do not envisage these pressures easing before the lead into the key Christmas trading period, and this will potentially combine with increased consumer austerity and inevitable category mean reversion to pre-Covid trends."

Reliable growth

Macro pressures have weighed heavily on growth stocks this earnings season, with investors prioritising structural tailwinds, pricing power and operational efficiency.

"What we observed was that any top line surprise and or margin resilience/ strength was ultimately well rewarded and this was seen clearly in reactions to results like:

• James Hardie (ASX: JHX)

• REA Group (ASX: REA)

• Goodman Group (ASX: GMG)

• Breville Group (ASX: BRG)

• NEXTDC (ASX: NXT)

• Altium (ASX: ALU)

"This also extended to recent fall out candidates like Idp Education (ASX: IEL) and Domino's (ASX: DMP) where outlooks allayed some structural concerns."

Tech names, meanwhile, have failed to maintain the momentum of the first half, with notable WiseTech Global (ASX: WTC) selling off almost 20% on the back of its results.

Healthcare up against it

It's been tough going for Aussie healthcare, a corner of the market usually treasured for its earnings quality and compounding prowess. 

"The sector has seen a meaningful de-rate over the course of CY23 with valuation multiples peaking at 33.5x to now rest at 28.0x of 5.5x turns lower," says Morgan Stanley.  "During results season the sector has also under performed down circa 4.0% vs ASX 200 down 2.7%."So where did the earnings quality go?Morgan Stanley's answer:"Healthcare is not exposed to quality at all - on our composite quality factor, Healthcare has the largest UW exposure. This can reverse for sure - but regaining earnings momentum and allaying disruption fears will be critical to see sector leadership return.

Dividends are down

Almost a third of reporting stocks (28%) have cut their dividends per share in FY24. "The ASX 100 stocks with material cuts to their FY24 dividend include:

• South32 (ASX: S32)

• Santos (ASX: STO)

• WiseTech Global (ASX: WTC)

• Ramsay Health Care (ASX: RHC)

• Woodside Petroleum (ASX: WPL)

• BHP Group (ASX: BHP)

• Reliance Worldwide (ASX: RWC)

• Nine Entertainment (ASX: NEC)

• Stockland (ASX: SGP)

Week 5 ideas

Of the stocks still to report, Macquarie like Harvey Norman (ASX: HVN) and Flight Centre (ASX: FLT) based on the earnings day outperformance we've seen from discretionary stocks thus far. 

"Harvey Norman is also a relatively unloved stock with more sells than buys on the Street while Macquarie Research Estimate is above consensus for FY24 EPS. NextDC (ASX: NXT) is Outperform rated and MRE's FY24 loss is less than consensus."

On the other hand, it doesn't favour some industrials. Namely Brambles (ASX: BXB) and Atlas Arteria (ASX: ALX), which Macquarie estimates are below consensus for FY24 for EPS and DPS respectively.    

"Both stocks are rated Neutral, have low short interest and are not already oversold based on William's R (momentum indicator). Given the propensity for non-bank financials to have weak outlooks, we also highlight MRE is below consensus for Liberty Financial Group (ASX: LFG)."

This article was first published for Livewire Markets on Tuesday, 29 August 2023.