The ‘buy-the-dip’ mentality remains strong as equities bounced back following the previous week’s negative performance. The S&P/ASX 200 rose 0.5% as materials and energy bounced whilst defensive sectors gave back some gains. The U.S. S&P 500 hit new highs again, rising 1.5% over the week, whilst emerging markets finally had a bit of a bounce with year-to-date returns rising back to positive territory.
Bond yields largely rose as the U.S. Federal Reserve came out of it’s annual Jackson Hole symposium with a signal that it would potentially start tapering before the end of the year. The Fed managed to balance this with dovish comments, noting that interest rates hikes are still a long way off and noted the threat of the delta variant, citing employment data as key to taper timing. Australian 10-year yields rebounded close to 1.2% and the U.S. 10-year yield rose to 1.3%.
Sentiment was also buoyed as Congress continues to make progress on large infrastructure packages, with the $3.5 trillion social infrastructure plan receiving House approval and the $1 trillion bipartisan infrastructure bill clears another hurdle. Both are not quite there yet but the finish line is now in sight. This helped to more than offset a largely disappointing set of preliminary results for Purchasing Manager Indices (PMIs), a key gauge for economic activity.
Australia’s PMI readings were disheartening though unsurprising, as the composite indicated that the Australian economy is now contracting again. Retail sales figures confirmed this as they fell 2.7% for the month, below consensus estimates.
Looking ahead, there are still several companies reporting this week but the bulk of earnings season is now behind us. This week, second quarter GDP figures for Australia will be released but the market is forward looking so final PMI readings, U.S. consumer confidence and the U.S. employment data will be of more interest.
Earnings season recap – week 4
With the end of week 4, the bulk of major company reports are now behind us and we will return to writing about other points of interest from next week.
The star of the week was WiseTech (WTC) as it had a huge beat and raise with margin expansion and a large deal with global player Fedex being key highlights that have investors dreaming of world domination.
Other companies reporting beats included NextDC (NXT), IOOF (IFL), Woolworths (WOW) and Wesfarmers (WES). Unlike WTC, investor reactions were mixed for all four. WOW had a decent day as it had a strong 2021 financial year and posted a trading update that showed improved sales momentum for the key supermarkets business as lockdowns returned. WES fell on the day as investors already priced in strong results with a good run-up in anticipation of earnings. The retailer also gave a trading update that showed sales since July were struggling on the back of lockdowns.
NXT beat its recently raised guidance as it continues to see strong growth in customers and revenue. However, it fell slightly as management noted some development delays due to restrictions in Sydney and higher capex flagged for this financial year. With development ongoing to raise its capacity from the current 95.8MW built to over 400MW, we remain positive on NXT.
IFL beat estimates but fell on the day as management flagged further transition from legacy products which will likely remain a pressure on already slim margins. There has been little time since the MLC acquisition so it remains to be seen if management can execute the cost-out strategy which will drive the bulk of earnings growth over the next few years.
Companies of interest posting more in-line reports include Sonic Healthcare (SHL), Ramsay Healthcare (RHC) and A2Milk (A2M). SHL and RHC show contrasting fortunes in the healthcare sector, with SHL strongly benefitting from COVID testing volumes, whilst RHC has seen elective surgeries fall due to lockdowns. Both reported solid earnings and refrained from providing any guidance, highlighting the uncertainty for both COVID winners and losers in the current environment.
A2M had another big fall, though it only reversed its pre-earnings run-up, despite meeting downgraded expectations. There were signs that its issues extend beyond the closed border and inventory management, with the U.S. business losing a major channel partner to a private label substitute and management flagging lower margins, with the loss of confidence evident in their commentary. As a result, we do not expect a quick recovery in earnings for A2M apart from a reversal of the large inventory impairment it took for the 2021 financial year.
As for the misses, Afterpay (APT) and Appen (APX) both disappointed relative to consensus. APT reported with a big earnings miss as it continues to plough money into marketing as the focus remains on revenue growth which continues to be strong. With the Square scrip takeover, APT will likely continue to trade based on the Square price.
APX posted a surprise drop in revenues for the half year but management was confident of meeting full year guidance (the company’s fiscal year follows the calendar year) after adjusting for its Quadrant acquisition as orders in hand for 2021 delivery was up significantly on the previous year. With the bulk of its most profitable segment, Global Services, usually coming in the final quarter of the year, management reiterated confidence for margins to recover after a weak first half due to development expenditure. Understandably, the market currently doubts management commentary, punishing the stock significantly. However, we think that there are underlying positives such as the strength of APX’s new markets business and the increased quality of its order book but concede that APX needs to show the market that the last 12 months has been an anomaly and that it remains relevant in the AI relevance industry.