Earnings Season is Here – and It’s Going to be Ugly
With July coming to a close, it’s time for reporting season – and this year, it’s not going to be pretty.
Investors are used to going into reporting season not sure of what earnings are going to, but this year, it’s many companies.
Estimates from analysts are flying much blinder than they normally are: because we have so many instances of earnings downgrades (and by such significant amounts!) in recent months, analysts’ forecasts have become very conservative.
According to the research team at Macquarie, during the peak of the pandemic, 38% of the S&P/ASX 100 stocks withdrew their guidance, while another 18% reduced guidance. In any normal year, the market would trash the share prices of companies ditching earnings guidance, but this is not a normal year.
The rush to abandon previously issued guidance has made the rare reaffirmations of guidance effectively an upgrade – it was rare in the June half for stocks to hold on to guidance, but the likes of Appen, CSL, logistics property giant Goodman Group, shipbuilder Austal and skincare and beauty products maker BWX managed the feat.
(Reinstated guidance was even more rare: personal grooming retailer Shaver Shop withdrew its FY20 earnings guidance in March, and took back its already announced interim dividend of 2.1 cents a share, 80% franked, saying it needed to preserve cash; But SSG rebounded spectacularly in the June quarter, enabling it to reinstate its guidance and announce a special dividend equivalent to the dividend previously announced and cancelled.)
The Macquarie analysts expect only about half of the normal number of ASX stocks to give FY21 guidance in August, when announcing full-year FY20 results. Those that do might only quantify their outlook for specific variables and segments instead of for the whole business.
Clearly, earnings are going to be badly affected in this reporting period by the impact of COVID-19, and the shock of sharply reduced demand. For every Temple & Webster, reporting that sales in June surged by 130% year, on-year (in its third straight month of 100%-plus revenue growth) there are many more companies struggling. Analysts will be looking for the effect of the application of accounting standard AASB16 governing leases, and the extent to which things like rent reductions and holidays, and even JobKeeper, distort reported earnings. Plenty of listed companies are receiving JobKeeper.
Obviously, reported earnings will be lower in the great majority of stocks. Going by FactSet’s numbers, analysts’ consensus expects earnings per share (EPS) decline across the market of 20.5%, led by
- Resources (-12.8%)
- Mining and metals -3.7%
- Energy -44%
- Financials (-27.3%)
- Banks -29.5%
- Insurance -69.6%
- REITs -4.6%
- Other financials -11.2%
- Industrials ex-Financials (-15.3%)
- Discretionary retail +5.7%
- Consumer staples -3.2%
- Health Care -2.2%
- Media -30.9%
- Gaming -43.4%
- Other Materials -11.7%
- Telcos 3.8%
- General Industrials -36.2%
Any company delivering an earnings “beat” will be welcomed more than is usual.
Dividends are also likely to come down. Typically, the S&P/ASX 200 pays out about 70% of earnings as dividends, but current expectations are for the payout ratio to come down to about 60%. Companies will be very mindful of protecting that balance sheet.
It gets a little better in the current year, FY21. Consensus estimates have market EPS growing by 8.1%, or 11.8% excluding resources, which will be a slight (-1.1%) drag on the market, despite a rebound (+12.2%) from energy earnings. Elsewhere, insurance is projected as a huge recovery (+184%) in FY21, as is Tech (+222% in FY21, after a 9% fall in FY20). Analysts still see weakness in FY21 in Utilities, Telcos, Discretionary Retail, REITs and Mining and Metals.
Another likely feature of this reporting season will be write-downs: companies hit by a sharp downturn in trading conditions will be pressured to devalue assets. We have already seen this happening in the energy sector, from the likes of Woodside Petroleum and Origin Energy.
Outlook statements are always closely scrutinised, but this year, companies that offer them will be very brave – too much remains unknowable about COVID-19. Comments on the financial period so far – that is, trading in July and August – will also be pored over closely. But it’s probably wise not to expect much in the way of earnings guidance for FY21 to be provided.
For those companies exposed to discretionary spending, the extent to which government stimulus has helped to insulate their business, by supporting consumers, will also be interesting – to say the least – because this support can’t last forever.
The bottom line is, for the great majority of stocks, don’t worry about FY20 expectations, they’re going to be down: the best you can hope for is a bit more optimistic outlook on FY21, given the uncharted waters that companies find themselves in.