WILL EARNINGS RELEASES LIVE UP TO EXPECTATIONS?
Mark Lister, 9 February 2023
The corporate reporting season starts next week, and we can expect a landslide of earnings announcements from NZX-listed companies.
There won’t be much time for analysts to warm up their spreadsheets, with heavyweights Contact Energy, Fletcher Building and Sky City set to kick things off over the next few days.
Most of the results should be solid, with the economy remaining resilient during the second half of 2022.
The labour market has been strong, and at 3.4 per cent the unemployment rate is close to the lowest levels since the 1980s.
Wage growth has slowed a little, although last year it was running at an annual pace of 8.6 per cent, the highest in at least 30 years.
While that’s been supportive for consumer spending, it will have also meant rising costs and labour shortages.
For those without pricing power (which means the ability to increase costs without losing customers) this will have eaten into profit margins.
The likes of Spark and the electricity companies should prove more insulated from this, but those exposed to discretionary spending will have found it tougher.
Prices for our export commodities have been solid, and a slightly weaker currency should’ve assisted some exporters.
Fisher & Paykel Healthcare (our biggest company) isn’t scheduled to report until May, although it has earnings momentum and another upgrade is possible before then.
Its healthcare stablemate, EBOS Group, should deliver a solid result.
Tourism Holdings could be another one to keep an eye on, with the rebounding tourism sector likely to benefit the company.
In addition to being an infrastructure hub, Port of Tauranga is another company that performs well when the export market is robust.
The fortunes of a2 Milk are more difficult to pick.
It looks to be back on track after a difficult period, but delays in getting new approvals to keep selling infant formula into China are taking longer than they should.
Higher interest rates will also be in focus, with the Official Cash Rate at its highest level since 2008.
The bulk of our listed companies have strong balance sheets, which means they have limited exposure to the higher borrowing costs.
However, the retirement sector could find itself in the spotlight.
Companies like Ryman Healthcare are property developers as well as aged care providers, and the combination of higher interest rates and falling house prices is proving a headwind.
The listed real estate sector has been similarly out of favour. Current share prices imply steep declines in underlying property values, and the upcoming results will help us gauge if investors are too pessimistic.
The reporting season is always a crucial time for the market, and this month will be no different.
With the NZX 50 index having rallied more 15 per cent from its June 2022 lows, there is more room for disappointment than there was six months ago.
Although it’s still ten per cent down from the peak of two years ago, the index is trading at its highest levels since March 2022.
Having said that, a lot of this strength has been driven by the biggest companies on the market.
Twelve stocks represent about 70 per cent of the NZX 50 index, and (on average) these are trading within 7-8 per cent of their 52-week highs.
When you look at the rest, you find that many companies remain well below these levels. On average, the remainder are still more than 20 per cent below their 52-week highs.
Some of this weakness is justified, but it also means the bar could be lower for many of these businesses.
We might see a few results that - while fairly ordinary – are better than expected, and this could lead to share price gains despite the lacklustre headlines.