What ASX investors should look for in a COVID-19 earnings season
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Forward guidance and an ability to meet revised forecasts following the start of the COVID-19 pandemic are what analysts and fund managers are looking for during the upcoming earnings season.
Investors are already being primed by analysts and media reports for a “shocker” season of full-year results, after companies around the world pulled guidance and prepared for the worst.
However, entire sectors and some companies have already shown in fourth-quarter reports that while the season will be rough, not all companies on the ASX are set to join the bloodbath.
These include Australian online furniture retailers, and companies such as Somnomed (ASX:SOM), which makes sleep apnoea mouthguards and posted less-bad-than-expected fourth quarter sales, and ResMed (ASX:RMD) which reported profit of $US193.3m, up 40 per cent and above analyst estimates, and revenue of $US770.3m.
“Analysts were relatively pessimistic and slashed earnings estimates during the period of peak uncertainty and panic back in March,” Saxo Bank Australian markets strategist Eleanor Creagh said.
“Perversely the lowered bar gives companies a helping hand and for those beaten down companies that manage to do a lot better than expected, there will be opportunities.”
Almost all companies pulled their full-year guidance in March and April after the full impact of the COVID-19 pandemic began to become apparent.
It means investors are going into earnings season without much clarity as to what to expect.
Analysts are looking to forward guidance for an idea of what to expect for the next year, given the recent disruptions to the last one.
“I think we are at a time where earnings, both looking backwards as well as management guidance which is typically extremely important, need to be taken not with a grain of salt, but through the lens of the high level of uncertainty which we’re in right now,” Pat Garrett, co-chief of robo-advisory Six Park, said.
Garrett is looking for how closely companies have met revised guidance — hitting guidance or coming close in this environment will give management a little extra gloss than in non-crisis years.
If a company misses their COVID-19 guidance “by a material amount” he says that is a sign there could be something fundamentally wrong with the business model.
Few companies are expected to offer guidance, but Morgans healthcare analyst Scott Power says those that do are likely to be rewarded by investors.
Of the first eight companies to report their full-year results, in late July, only Credit Corp (ASX:CCP) offered any earnings guidance for 2021.
Offering a view of the future is difficult and, as a Magic 8-ball might say, hazy.
There is uncertainty on issues such as economic recovery, how long government assistance will last, and the ability of authorities to handle future outbreaks.
Saxo Bank’s Creagh says company outlooks will draw far more attention than usual over the numbers themselves, although there will be less companies offering guidance.
“The problem with the root cause of this crisis being a global pandemic, there remains a huge amount of uncertainty as no one, not even the epidemiologists can tell us definitively how this plays out, and some experts are on record saying it could be two years before a vaccine can be successfully implemented,” she said.
Old school financial companies, media companies that rely on advertising, and brick and mortar retailers which have still not got a strong online sales channel are the biggest losers of the shift to a ‘COVID economy’.
Goldman Sachs says telcos are likely to be a surprise winner, while Credit Suisse says coal is out but iron ore and gold are in.
In the COVID economy trends such as telehealth, remote learning and a shift into the cloud have accelerated. Companies able to take advantage of these are benefiting.
“Pre-crisis trends have been accelerated – increasing income inequality and social unrest; digitisation and disruptive technologies; secular stagnation and proliferation of zombie companies; trade tensions and deglobalisation; fragmenting of geopolitical architectures – all are examples of structural inhibitors that have been accelerated by the emergence of the global pandemic,” Creagh said.
Companies agile enough to take advantage of lockdowns, such as the online retailers and corporate health startups, have gained market share at the expense of the “old economy”.
And while online retailers, remote educators, telehealth operators or companies selling the latest corporate wellness program are in blue sky territory — because no one knows when or if the status quo will return — some will rise and most will fall.
Companies in new and rising industries are competing in a land grab right now, where the “winner takes it all”, according to Creagh.
Six Park’s Garrett says some companies will have gone into the pandemic well positioned to scale up, and others will implode under the pressure.