Market Update: August Reporting Season

Market Update: August Reporting Season

Market Update: August Reporting Season 150 150 Piers Bolger

This month has been all about company reporting season. So far about 85 out of 160 companies have released their half-year or full-year results and nearly 50% have beaten market expectations. Of course, that means 50% haven’t met expectations which will affect their earnings outlook for 2019. This is framing how we think about your portfolio.

The earnings outlook is shifting for some companies

To look at how the results impact future earnings let’s take a closer look at two companies – Commonwealth Bank (CBA) and Wesfarmers (WES).

CBA’s result was below expectations. They had a decline in cash earnings of about 5% that was driven partly by operating expenses and the regulatory environment. For example, the $700 million fine they received in the AUSTRAC scandal and increased costs associated with the regulatory aspect of their Wealth and Insurance businesses, which is currently being laid bare through the Royal Commission. But the most disappointing aspect of CBA’s result was the decline in their earnings forecast. They’re in the process of divesting a number of divisions which is ultimately feeding into lower forward earnings in our view. We now expect their earnings growth to be about 3%. So while we continue to hold CBA in our portfolio, mostly on the back of its dividend, we don’t expect it to be a strong earner next year.

On the flip side, Wesfarmers had a strong result. Cash earnings were up over 5% with all of their divisions contributing. Bunnings’ earnings were up 12%, Target and Kmart were up 21% and Officeworks was up about 8%. While Wesfarmers is divesting Coles in 2019, the business had a turnaround this year and showed significant improvement. When compared to Woolworths’ recent results, Coles is now in a strong position.

Overall, we see good growth opportunities for Wesfarmers which is in stark comparison to CBA. So when we think about those two businesses, we have a preference for Wesfarmers over CBA.

How this impacts your portfolio

When you next speak to your advisor talk to them about how your portfolio is positioned for growth. When we look at your portfolio we look to find the right balance of income and organic growth – through companies like Wesfarmers, CSL, Computershare, Treasury Wine Estates and a2 Milk.

Your advisor can give you more information about what companies you have in your portfolio, how they’ve performed and where we believe they’re headed from an earnings perspective. They can also advise you on how to position your portfolio so you have the right blend of income and growth-oriented stocks.

Piers Bolger is Chief Investment Officer at Viridian Advisory

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