This is what you missed during reporting season

Despite the headwinds caused by Covid-19, its lockdowns and supply chain disruptions, the February 2022 reporting season delivered positive earnings momentum. Blackmore Capital’s Marcus Bogdan says net earnings upgrades to S&P/ASX 200 profits were  0.9% or $1.3bn, the second strongest result since the global financial crisis. 

Bogdan goes on to say, “Reporting had some pleasant surprises, there were more upgrades than downgrades despite several concerns, which are still present. It was led by financials, with very strong results from Macquarie, CBA and NAB. The commodities side delivered strong earnings as well, BHP delivering solid earnings growth with a higher dividend. And that’s led to upgrades.”

Value stocks continued to outperform relative to growth stocks, due to inflationary pressures and the onset of tighter financial conditions. Bogdan says, “Healthcare has been a chronic under-performer through Covid, with a few exceptions. The last six months have been painful. Fast-forward to today, the backlog of patients and for broad testing for elective surgery looks incredibly positive. Whether its CSL or Ramsay Healthcare (ASX:RHC) they are key stocks that will do well for a couple of years.”

A sharp rise in volatility, brought on by global geopolitical events should have caused the local market to sell-off. Yet against this backdrop, the S&P/ASX 200 rose 2.1% in February with the Energy, Materials and Banking sectors adding the most value, while healthcare, technology, and telecommunications lost value.

Blackmore Capital has listed key themes of the February 2022 reporting period:

• The S&P/ASX 200 delivered a solid reporting scorecard. Earnings momentum continued delivering earnings-per-share (EPS) upgrades above the long-term average. Net earnings upgrades of 0.9% equates to ASX 200 profits for FY22 to be in the vicinity of $141bn.
• Earnings momentum favoured Cyclical and Value stocks. The uplifts in earnings were largest across the Banks, Energy and Material sectors; whereas the high P/E sectors of Healthcare and Technology broadly disappointed. For Healthcare, two years of postponement of non-Covid healthcare weighed on results.
• Cost pressures. Strong revenue growth was offset by persistent cost pressures resulting in modest compression of EBITDA margins, with industrial companies most affected.
• Capital allocation discipline. Despite buoyant revenue growth, investment spending (capex) intentions remain modest. Firms continue to favour buybacks, and M&A. Capital returns were the second highest in the past decade.
• Balance sheets remain conservatively geared. The S&P/ASX 200 companies’ net debt/EBITDA ratio of about 1.2 times is close to 20-year lows, with rising interest rates not yet translating to higher interest costs.
• Commodities’ tight supply constraints. The potential for sanctions on Russian exports across key commodities (energy, grains, metals) while global inventories are already extremely tight has pushed commodity prices higher and resulted in boycotts by commodity traders unwilling to be exposed to Russian export cargoes, especially in crude oil. 

Bogdan finishes by saying, “Currently there are many sources of risk that investors are contending with. The tragic events unfolding in Ukraine have introduced further unknowable challenges and risks to the global economy. Nevertheless, Australia’s tyranny of distance to the epicentre of Europe and its abundance of natural resources in agriculture, energy, and minerals provide a solid footing for the continued growth of the economy and corporate earnings.”

Despite the volatility, Blackmore’s equity portfolios remain focused on holding high-quality industry leaders underpinned by strong balance sheets.

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.