Mark Lister, 6 June 2018

A feature of the last month has been the market reaction to results from some of our growth businesses. The a2 Milk Company was the highest profile of these, with the share price falling almost 14 per cent on the day a third quarter update was released.

However, a2 wasn’t the only company to suffer at the hands of demanding investors. PushPay, Gentrack and Fisher & Paykel Healthcare were all treated in a similar manner (albeit much less severely) following the announcement of earnings results.

Casual observers could be forgiven for being somewhat puzzled by this, especially as the headlines in all of these company updates made for fairly upbeat reading.

Recently anointed as the largest company on the local sharemarket, a2 said group sales were up 70 per cent on the previous period and noted revenue for 2018 would be between $900m and $920m. The comparable number in 2017 was $550m, so that’s a phenomenal uplift.

PushPay talked about another strong year of growth, with total revenue more than doubling and gross margins expected to improve from 55 per cent to over 60 per cent.

Gentrack delivered a result at the top of its guidance range, with net profit up 50 per cent on a year earlier. Some of that growth was due to acquisitions, although the outcome is still impressive.

Fisher & Paykel Healthcare reported a record profit for the 2018 financial year, some 12 per cent higher than last year.

None of that sounds particularly gloomy, in fact it’s all quite the opposite. So why on earth did share prices fall in the wake of these seemingly strong results?

The answer is simply that expectations had got ahead of themselves. Despite plenty of good news, the market had become a little too excited and wanted more. The lesson for investors is that growth companies can be volatile even when they are hitting their targets, especially if investors become overly optimistic and set the unofficial bar too high.

Other notable highlights of the May reporting season were strong results from two of our traditional blue chip companies, Ryman Healthcare and Mainfreight. Both have managed to create a long and enviable track record of growing earnings and dividends with remarkable consistency.

Some will bemoan the fact they always look expensive and find it difficult to justify paying up for them. However, for long-term investors it’s hard to see these types of companies being anything other than great investments for many years to come.

On the other side of the ledger, Steel & Tube and Fonterra were lowlights. Steel & Tube downgraded earnings estimates, breached its debt covenants and might have to suspend dividends for a period.

Fonterra did the right thing by its farmer suppliers, but the pleasing uplift in the milk payout appeared to come at the expense of Fonterra shareholders who will see lower earnings and dividends from here on.

On balance, there were certainly more positive stories than bad ones. Markets will now look ahead to the August reporting period (which will be much busier), and the “confession season” that precedes it in July.


This article was also published on the New Zealand Herald under Mark Lister: Market suffers if investors get too excited on 5 June 2018.