In today’s editorial we will take a quick look at the reporting season, and assess whether it has been a success in the eyes of the market.
Of the approximately 100 ASX 200 companies that reported their results up to the week ending February 21, 55% have beaten consensus earnings estimates.
This number is not particularly impressive when compared to the US. Approximately 77% of S&P500 companies that posted results during the recent US earnings season exceeded analyst estimates.
Still the current Australian reporting season is tracking better than recent periods.
This time last year, around 46% of ASX 200 companies beat analyst estimates, whilst the August reporting season saw 52% of companies exceed expectations.
Investors appear to have given a tick of approval to the current reporting season – the ASX 200 has risen 4.8% in February (week ending February 21).
Of course, part of this gain is due to the broader global market rally. But even after accounting for this, the ASX 200 has been one of the top performing global indices.
Below we graph the 2014 trend in the ASX 200 (green line) and the MSCI World ex-Australia index (white line).
Both markets are indexed with a base value of 100, so the final figures on the right-hand side of the chart are presented as a percentage change from 100.
As shown, the MSCI World ex-Australia index has yet to fully recover the losses it sustained during January’s global sell-off.
In comparison, the ASX 200 has more than recovered its January’s decline and based on last Friday’s close, is now up 1.6% in 2014.
It is notable how the divergence between the green and white lines has become more pronounced over the last two weeks, as earnings season kicked into full gear.
The rising trend in the percentage of companies that have reporting analyst-beating results, and the relative outperformance of the ASX 200, indicates the current earnings season has so far been a success.
So what have been the key themes of this reporting season? Most of the sectors have common criteria by which success has been measured.
The big miners BHP and Rio Tinto have been rewarded for cutting capital expenditure, paying down debt and growing cash flow – a big change from the revenue growth at-all-costs mentality during the boom years.
Cost cutting and cash flow growth has also been a feature among mining related stocks.
Monadelphous jumped 10% the day after announcing a 1% drop in 1H14 revenue. More impressive was the 80% climb in operating cash flow and ~$34 million in annualised cost savings that prevented margin erosion during the half.
More impressively was Fairfax Media which, despite suffering another major drop in advertising revenue, managed to lift its 1H14 underlying profit by more than 40% due to a significant cost reduction and repayment of debt (lower interest expense).
In response to the sudden deterioration in US economic activity after the GFC, American companies acted quickly and decisively to shore up their businesses.
The focus on improving operational efficiency and repairing the balance sheet has allowed these same companies to deliver record-breaking profits in what remains a challenging revenue environment.
The current reporting season indicates some Australian companies are following the lead of their American counterparts – which is slimming down in order to grow.
Low P/E companies achieving a mixture of cost savings, debt reduction and cash flow growth are being rewarded by the market even though top line growth continues to be static.