WHAT WILL WE LEARN FROM UPCOMING COMPANY RESULTS?
Mark Lister, 11 February 2022
The local reporting season begins on Monday, and over the rest of the month we will hear from most of our major listed companies.
Next week’s highlights will include heavyweights Contact Energy, Sky City and Fletcher Building – as well as the top performer in the NZX 50 during 2021, Skellerup.
Analysts and fund managers will have the opportunity to stop fretting about inflation and refocus on what matters most for share prices in the long-term – company earnings and profits.
If its anything like the US reporting season, it'll be fairly good.
Despite a few very high-profile misses, notably Meta (Facebook), the bulk of large US companies have met expectations and posted solid results these last few weeks.
These US results are all for the December 2021 quarter, and the aggregate growth rate (compared to the same quarter a year earlier) is sitting at close to 30 per cent. That will mark the fourth consecutive quarter of earnings growth above 25 per cent.
However, we’re still playing catch up from the weakness of 2020, which makes those big numbers a little misleading. They're being compared with a very difficult period, which makes the rate of change look artificially high.
Things are expected to normalise this year. Overall, the S&P 500 is expected to see aggregate earnings increase by 8-9 per cent in the 2022 calendar year, compared with 2021.
On a less upbeat note, commentaries about the future have become a little more cautious, which has seen the US analyst community pare back estimates slightly for the upcoming period.
I think we’ll see something similar locally. Results should be solid, if unspectacular.
The economy was in great shape through the back half of last year. Unemployment was low, consumers were upbeat, house prices were rising strongly and despite the ongoing restrictions, confidence was generally riding high.
Dairy prices were consistently trending higher, while the NZ dollar fell in the latter months of the year, adding support to the export sector.
A lack of profit warnings is also comforting. We’ve seen a few since the summer break, but they’ve been largely unsurprising.
Travel company Serko has suffered from the ongoing border closures, while NZ King Salmon and Sanford have continued to struggle amidst company-specific issues.
Last month’s negative announcement from The Warehouse is perhaps the most telling, and this provides a clue to what we might hear in outlook commentaries in the coming weeks.
Headwinds are increasing in 2022. Inflation is high, which takes money out of people’s pockets. At the same time, interest rates are rising, increasing borrowing costs and crimping disposable income further.
Some heat is expected to come out of the property market, which could dent confidence and slow activity as the wealth effect works in reverse.
Businesses won’t be immune to this, and we should watch for signs of margin pressure due to rising costs.
The tight labour market has swung the balance of power back towards workers, which means some firms will have needed to increase wages to retain talent.
Many companies have found it relatively easy to push through prices increases in the last year, without any real impact on customer demand. That might get a little harder from here.
Consumers are facing rising costs from all angles, as well as falling real incomes (with the cost of living rising more quickly than incomes) and this next phase of the cycle could unearth those businesses with genuine pricing power.
On balance, I think this earnings season should be solid, with results reflective of an economy that’s been in very good shape.
With our market about ten per cent below its January 2021 peak, and having flatlined for much of the past year, share prices aren’t setting the bar unreasonably high either.
However, outlook commentaries could take on much more importance than usual, given the changing backdrop and the increasing headwinds looming in the year ahead.
This article was also published in the New Zealand Herald under the title 'Mark Lister: What will we learn from New Zealand company reporting season?'