Home / ASX / In ‘mixed bag’ earnings season, big profits don’t clear cloudy outlook

Despite continuing strong economic data for Australia, markets have forecast significant earnings downgrades, and results have been mixed so far. But a main highlight - CBA's record $10 billion profit - may not be enough to improve investors' outlook on the banking sector, analysts say.

With earnings reporting in full swing, a “mixed bag” of results so far has investors cautiously optimistic on corporate performance but concerned about inflation impacts, analysts say, while Commonwealth Bank of Australia (ASX:CBA)’s record profit has not quelled fears of challenges in the banking sector.

Of 45 companies reporting through Wednesday, 19, or 42.2 per cent, met their expected earnings, while 17 (37.8 per cent) beat expectations and nine (20 per cent) missed, FNArena’s Corporate Results Monitor shows. GWA Group (ASX:GWA) and Baby Bunting (ASX:BBN) were among six earnings upgrades, while two companies – Bendigo & Adelaide Bank (ASX:BEN) and Beach Energy (ASX:BPT) – saw downgrades.

“Australian companies have been citing growth during this earnings season – just at a slower rate,” Mishan Dahia, investment analyst at Atchison Consultants, tells The Inside Investor. “This is in line with market expectations over the next 12 months, as consumers are tightening their belts in the face of sticky inflation and higher interest rates.”

According to Martin Currie chief investment officer Reece Birtles, “contradictory forces” and weaker economic expectations have markets forecasting significant earnings-per-share (EPS) downgrades despite continuing strong economic data for Australia. The weak property outlook in China and lower commodity price forecasts weighed particularly on resources companies.

“Conflicting drivers have created a real disconnect between EPS revisions and company share prices,” Birtles says. “Earnings outlooks appear to be driven by the fundamentals, whereas stock prices are being driven mainly by the China stimulus hope.”

Rachel Waterhouse (pictured), CEO of the Australian Shareholders’ Association, tells The Inside Investor that recent discussions show ASA members are “cautiously optimistic” based on the earnings reported so far. While results have been “quite mixed”, she says, the quality of communications to retail investors has stood out, with some companies managing reduced expectations particularly well – “for example, CSL gave a heads-up right before reporting impacts to its profits”.

Concerns grow about consumer sectors, property

For non-resources sectors, the main challenges have stemmed from weaker domestic expectations, which continue to dominate the outlook. Waterhouse says ASA members expressed concern for property, and Australian real estate investment trusts (AREITs) in particular, as the impacts of a slowing economy play out on offices and production centres.

“CSL and JB Hi-Fi are both very good at stating the risks to earnings and making that quite clear in their communications with investors,” she says.

Dahia points to the expected jump in Australian mortgage holders experiencing significant hardship as they transition from fixed- to floating-rate loans. “The reduction in disposable income will be substantial due to both the rate of adjustments and the cumulative effects of prior rate increases (which have not yet been fully felt by all borrowers),” he says. “However, there is a silver lining as the labour market has shown resilience and remained tight.”

In contrast to resources downgrades ahead of reporting, lead-in EPS revisions for industrials, financials and real assets were broadly flat, Birtles notes, with a general lack of profit warnings also suggesting more balanced results for non-resources sectors.

One bright spot has been information technology, which “continues to rise and defy the odds – especially in the face of high-interest rates and persistent inflation”, according to Dahia.

“On the other hand, an unexpected narrative is a slump in what is considered the ultimate equities defensive sector – Australian healthcare, down 1.16 per cent year to date and the only S&P/ASX 200 sector finishing in the red. CSL was a large detractor from the healthcare sector, battling falling margins, higher blood donor fees, higher labour costs, lacklustre growth margins and missing analysts’ expectations.”

Record CBA profit may signal peak

Among the most-anticipated companies to report this season, CBA on August 9 posted a record profit of $10.16 billion, up 6 per cent from a year before. Despite the earnings beat, as well as a 14 per cent dividend increase and an announced new buyback, analysts and investors appear to be becoming wary of holding too much of the bank, or its competitors.

“Commonwealth Bank may be one of the most widely held stocks in the country, but in recent months many market analysts have placed sell recommendations on the bank due to concerns about the headwinds it, and the wider banking sector, is facing,” says Alice Shen, manger, investments at VanEck.

“Reporting seasons can often act as triggers for investors to consider their portfolios, and CBA’s recent presentation could prompt many to consider their approach and concentration in Australian equities,” she adds.

Waterhouse notes that, among many positive comments from ASA Members about CBA’s performance, she observed heightened investor concern about the impacts of high inflation on things like revenue, sales and dividends. “There’s a lot of concern around the consumer spending slowdown and what that may mean.”