Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Thematic (Sector/Industry)

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Reporting Season Performance. Our recently published Earnings Season Wrap highlighted concerns about the number of downgrades to FY19 earnings during the reporting period, particularly in Mining, Financials and Consumer Discretionary.  However, despite the number of analysts downgrading earnings, the magnitude (-0.1%pts) was modest relative to the long-run average during August (-0.6%pts).  Analysts still expect a solid 6.6% increase in EPS during FY19.  In FY20, EPS growth is expected to accelerate to 8.8%.</li>
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Taking a Leap of Faith.ALU, WEB, SKI, SGP, CHC and SWM have seen not only strong increases in consensus EPS growth forecasts, but the strong net number of upgrades add a further layer of conviction to the outlook for these stocks.  All of these stocks saw improvements in earnings quality during the half, but only SKI made the top 20 stocks with the largest improvement in earnings quality over the past 4 years.  SGP decline saw a decline in earnings quality during the half and this raises questions about analysts’ enthusiasm.</li>
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Clearing the Decks with Conviction. The strongest downgrade conviction appears to be in SDA, WOW, SGM, PRY, VOC, ABP, CGC, WBC, GEM, AHG, NAN, RHC and AMC given they are at the bottom of the list of net upgrades and the bottom of the list for EPS growth revisions.  WOW, SDA, SGM, RHC all saw declines in earnings quality that supported the strong conviction around downgrades.  </li>
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The downgrades to ABP, GEM, CGC, and AHG all occurred against an improvement in earnings quality that could suggest these stocks have been marked down too far. In particular, we estimate that both PRY andVOC saw a strong positive shift in earnings quality during reporting season.  NAN has a good longer-term track record for earnings quality and an improvement in earnings quality during reporting season, but this doesn’t appear to be supporting the share price against the downgrade headwinds.</li>
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NCM saw cuts to earnings growth at the start of year translate into improving earnings growth during reporting season. However, downgrades still outpace upgrades and this suggests little conviction in the outlook.  The stock also</li>
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A relatively thin base has emerged in the key sectors. Downgrade momentum seems to still be entrenched in Banks and it is too early to move back into the sector, despite attractive valuations.  The downgrades in Mining have been broad, but the large diversified miners have thrived.  Copper plays such as ILU and SFR and Lithium miners MINSYR and ORE have been hard hit and there is a lot of conviction about the downside risks to SGM.  Overall, we think the index can rally back, but this relies upon global growth remaining resilient to the trade war.  There is probably limited downside for the Banks, given the low hurdle to jump to beat earnings.</li>
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Reporting Season Performance. Our recently published Earnings Season Wrap highlighted concerns about the number of downgrades to FY19 earnings during the reporting period, particularly in Mining, Financials and Consumer Discretionary.  However, despite the number of analysts downgrading earnings, the magnitude (-0.1%pts) was modest relative to the long-run average during August (-0.6%pts).  Analysts still expect a solid 6.6% increase in EPS during FY19.  In FY20, EPS growth is expected to accelerate to 8.8%.

Taking a Leap of Faith.ALU, WEB, SKI, SGP, CHC and SWM have seen not only strong increases in consensus EPS growth forecasts, but the strong net number of upgrades add a further layer of conviction to the outlook for these stocks.  All of these stocks saw improvements in earnings quality during the half, but only SKI made the top 20 stocks with the largest improvement in earnings quality over the past 4 years.  SGP decline saw a decline in earnings quality during the half and this raises questions about analysts’ enthusiasm.

Clearing the Decks with Conviction. The strongest downgrade conviction appears to be in SDA, WOW, SGM, PRY, VOC, ABP, CGC, WBC, GEM, AHG, NAN, RHC and AMC given they are at the bottom of the list of net upgrades and the bottom of the list for EPS growth revisions.  WOW, SDA, SGM, RHC all saw declines in earnings quality that supported the strong conviction around downgrades.  

The downgrades to ABP, GEM, CGC, and AHG all occurred against an improvement in earnings quality that could suggest these stocks have been marked down too far. In particular, we estimate that both PRY andVOC saw a strong positive shift in earnings quality during reporting season.  NAN has a good longer-term track record for earnings quality and an improvement in earnings quality during reporting season, but this doesn’t appear to be supporting the share price against the downgrade headwinds.

NCM saw cuts to earnings growth at the start of year translate into improving earnings growth during reporting season. However, downgrades still outpace upgrades and this suggests little conviction in the outlook.  The stock also

A relatively thin base has emerged in the key sectors. Downgrade momentum seems to still be entrenched in Banks and it is too early to move back into the sector, despite attractive valuations.  The downgrades in Mining have been broad, but the large diversified miners have thrived.  Copper plays such as ILU and SFR and Lithium miners MINSYR and ORE have been hard hit and there is a lot of conviction about the downside risks to SGM.  Overall, we think the index can rally back, but this relies upon global growth remaining resilient to the trade war.  There is probably limited downside for the Banks, given the low hurdle to jump to beat earnings.


Putting Aussie Earnings Conviction to the Test

Australia

Vocation Limited operates as a full-service vocational education and training (VET) provider. The Company provides front-end student recruitment, education and training delivery and back-end student management services.

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Vocation Ltd (VET AU)

Putting Aussie Earnings Conviction to the Test

Reporting Season Performance. Our recently published Earnings Season Wrap highlighted concerns about the number of downgrades to FY19 earnings...

Shane Lee

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