Investment Matters

Profit reporting season preview

The FY-20 company profit reporting season is one of the most anticipated in recent years. It comes after a highly volatile period in every sense of the word. With the market having discounted a poor FY-20, the focus will largely be on the outlook for FY-21 and beyond.

As Covid hit, approximately 20% of ASX300 companies withdrew their earnings (i.e. profits) guidance (source: Morgans). This has flowed through to a lack of certainty in general and has led to low expectations for large portions of the market leading into this year’s reporting season.

Over the next few weeks, Investment Matters will be concentrating on the reporting season in general and in particular the results of companies that you own. All listed companies must report prior to the end of August.

With expectations for an ugly FY-20, the focus is on the recovery

The market has already discounted me of the prospect of weaker earnings in FY-20. This has been aided by updates provided by companies in recent months, some of which have surprised to the upside (for instance, Consumer Discretionary companies such as Accent Group and JB-Hifi). 

The general expectation is for a 15-20% fall in earnings in FY-20 across the market (Source: Morgans). 

However, the biggest point of contention is not FY-20’s earnings, but what the speed and magnitude of the subsequent recovery will be.

This has been more challenging to estimate.  And has resulted in a far greater difference in opinion, as shown by a greater dispersion in earnings estimates than we have seen in recently.

This is illustrated in the graph below, which shows the standard deviation of earnings estimates for FY-21 relative to previous reporting seasons.

We can see that the standard deviation leading into this reporting season is much higher, particularly for more cyclical sectors such as Energy, Industrials and Financials. 

310720MA

Much more of the focus this reporting season will thus be on commentary on the outlook for FY-21 and beyond.

With a greater difference in opinion between earnings estimates, we are also likely to see larger reactions when companies report (both positive and negative). 

The chart above highlights another phenomenon we have seen.  Post-covid, investors have placed a premium on certain sectors, some for which there is much conjecture around earnings, such as IT. 

Conversely, many of the more cyclical sectors where there is conjecture have attracted a discount, such as Energy and Financials. 

This creates potential for some of the more expensive "premium" stocks to under-perform expectations and conversely some of the more heavily discounted sectors to outperform.