Views at a Glance / Income Report; How are our stocks positioned for reporting? (GMA, NCK, CBA, SUN)

By Market Matters 01 August 18

Income Report; How are our stocks positioned for reporting? (GMA, NCK, CBA, SUN)

Market Matters Income Report 1st August 2018

A reasonable session underway today with weakness early on thanks to late news around Trump’s trade negotiations with China, however some decent buying across the miners has helped the market recover from early lows – the banks and broader financials providing most drag.

In terms of the MM Income Portfolio over the past week,  the portfolio was up 0.2%, slightly lower than the ASX 200 which was up by (0.23%). Overall,  the portfolio is up 7.46% since inception (5/7/17) versus it’s benchmark (RBA cash rate +4% - equates to 5.89%), while in the first month of the new financial year the portfolio added 1.37% vs the benchmark of 0.45%. Cash for now sits at 1.5%

Earnings season kicks into gear – how are our stocks positioned?

As the full year reporting season heats up we thought today we’d look at market expectations for the stocks in the MM Income Portfolio that report in the first week or so, and continue this theme over the next month. Market expectations are important both in terms of the current period but also where the market thinks the business will be in the next 12 months. As companies report there will naturally be variances and that will have an impact on share prices. The impact on share prices will be down to the quantum of variance but also how the shares have traded into the result, the current valuation, whether the trade is a crowded one, the level of short sellers involved in the stock, the mood of the market on the day, liquidity and a few other bits and pieces.

A lot of the factors are out of our control however we can be prepared with numbers at the ready for when reports do drop.

We’ll run a similar exercise across the Platinum Portfolio in the coming days, and obviously we’ll be reviewing (and writing about) results as they drop.

I’ve covered around thirty reporting periods and a few things have become obvious over that time. About half the companies meet expectations, about 25% beat and about 25% miss. The market reaction to beats and misses is very much dependent on the mood of the market at that time i.e. there is no hard and fast rules about what a stock should do on a particular percentage beat or miss. Volatility around reporting is higher after periods where the market has been strong for a sustained period of time (sounds like now) and stocks more often than not report in line with their current market trend, or in other words, the market is rarely wrong leading into the report. If its trending up then the report will most likely be better and vice versa on the downside. That doesn’t directly correlate into the share price performance after the result however it’s a notable trend in terms of the report itself.

At an overall level, this reporting season is likely to be a decent one given we’ve had very few companies come out during confession season (the period just before reporting where companies confess poor results) with the market overall expecting  8% growth in earnings. One of the areas that will be in focus this reporting season will be the highly valued growth plays. A note out the other day from Macquarie summed this up very well so I’ll use their words…

We have long held the view that the risk to high multiple growth stocks was not a rise in interest rates but rather the potential for earnings disappointment. This is the core of our belief that growth stocks can trade on high multiples as long as they don’t disappoint and that for the most part, they tend to de-rate on idiosyncratic (stock specific) rather than systematic factors. The problem with this scenario is that as the PE multiple rises, the cushion for disappointment continues to fall, or in other words, when priced for perfection the scope for imperfection is low. (source Macquarie)

In broad terms, the MM Income Portfolio is positioned towards value over and above growth. Value has been a difficult area in the past few years however we’re more comfortable holding a ‘cheaper’ portfolio at this stage of the cycle. We have 11 equities in the portfolio accounting for a 51% weighting, the rest being held in more defensive assets.

This week we’ll start by looking at the first found of companies reporting, which include GMA, CBA, SUN & NCK.

Genworth (GMA) – reports full year results today

Mortgage Insurer GMA is the first stock in the MM Income Portfolio to report earnings (out this morning) and the result may have looked like a car crash for those new to the stock, however it was ‘less bad’ than the market was positioned for and the stock is currently trading up ~3% at $2.77 at time of writing. They reported a decline in earnings of around 50% yoy with new issuance written of A$10.3b, which was down 21% y/y – both as per expectations. Importantly, they re-confirmed their prior guidance (which the market liked) and their dividend remained stable at 12cps (including a 4cps special), putting it on a yield of 8.66% plus franking , or around 12%. This is a capital return story with the company having excess capital on their balance sheet given weakness in sales.

·         We remain bullish GMA targeting a move back over $3.00

Genworth (GMA) Chart

Commonwealth Bank (CBA) – reports 8th August

Commonwealth Bank (CBA) has been the worst  performer of the big four this year and is the only major bank to report in August. It’s also the first full-year earnings report for new Chief Executive Matt Comyn as he reshapes the future for the bank. The risk in this result is if Comyn re-bases expectations after taking the helm, setting himself a better platform for future growth. Also watch compliance and funding costs which could play into the result.

The market is expecting full year revenue of $25.91b dropping down to a net profit of $9.422b, a big number while the dividend will likely be around $4.37 for the full year (which equates to $2.37 for this period). We remain keen on CBA leading into the result, however given the above mentioned factors, a negative surprise has a higher probability this time around than usual.

 

Commonwealth Bank (CBA) Chart

Suncorp (SUN) – reports 9th August

 SUN has enjoyed a strong run in recent times up from the mid 12’s to above $15 before both JP Morgan and Bells downgraded the stock this week, both to a hold and $15 price target - clearly there are now more risks for disappointment given the SP run of late. In their full year numbers we’ll be looking closely at underlying insurance margins and how they are tracking towards SUNs through the cycle 12% target, while volume and pricing will also be key. SUN is reducing costs and has excess capital in the balance sheet so the chance for a special dividend remains.

·         We remain bullish  SUN targeting ~$15.50 however less so now after the recent move up in price.

Suncorp (SUN) Chart

 

Nick Scali (NCK) – reports 10th August

 This is a stock that is trading poorly ahead of results, and as we suggested above stocks more often than not report inline with their current market trend, or in other words, the market is rarely wrong leading into the report. If that’s the case then NCK could be positioning for a weaker set of numbers. Earnings growth in this business has been very strong over the past 3 years and we’re yet to see actual signs that this is deteriorating (despite the negative structural trends playing out in domestic retailing).  

NCK has a reasonable history of beating expectations, since 2010 their average earnings beat is 3.46% and the average stock price change on the day is 4.91%. On 12.2x expected earnings and a grossed yield of 8.34%, it’s hard to see NCK getting hit too heavily on that multiple.

Nick Scali (NCK) Chart  

Conclusion (s)

GMA’s report this morning was solid and we remains bullish that stock

SUN has near term headwinds from recent downgrades, however we remain keen on the stock

CBA has more risk around this earnings report than usual, however it remain cheap, the same could be said for NCK

Have a great day

James / Harry &  the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 01/08/2018

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