That’s a wrap – The ASX earning season

So FY24 earnings are now done and from what we can see the results have been on the whole slightly better than expected. The catch is the numbers that we’ve seen for early FY25 which suggested any momentum we had from 2024 may be gone.

So here are 8 things that caught our attention from the earnings season just completed.

1. Resilient Economy and Earnings Performance

• • Resilience surprises remain: The Australian economy has shown remarkable resilience despite higher inflation and overall global pessimism. The resilience was reflected in the ASX 300, which closed the reporting season with a net earnings beat of 3 percentage points – a solid beat of the Street’s consensus. This beat was primarily driven by better-than-expected margins, indicating that companies are effectively managing cost pressures through flexes in wages, inventories and nonessential costs.
  • The small guy is falling by wayside: However, the reporting outside of the ASX 300 paints a completely different picture. Over 53 per cent of firms missed estimates, size cost efficiencies and other methods larger firms can take were unable to be matched by their smaller counterparts. The fall in the ex-ASX 300 stocks was probably missed by most as it represents a small fraction of the ASX. But nonetheless it’s important to highlight as it’s likely that what was seen in FY24 in small cap stocks will probably spread up into the larger market.

2. Season on season slowdown is gaining momentum

• • Smaller Beats what also caught our attention is the three-percentage point beat of this earnings season is 4 percentage points less than the beat in February which saw a seven-percentage point upside. That trend has been like this now for three consecutive halves and it’s probable it will continue into the first half of FY25. The current outlook from the reporting season is a slowing cycle, reducing the likelihood of positive economic surprises and earnings upgrades.

3. Dividend Trends

• • Going Oprah – Dividend Surprises: Reporting season ended with dividend surprises that were more aligned with earnings surprises, with a modest DPS (Dividends Per Share) beat of 2 percentage points. This marked a significant improvement from the initial weeks of the reporting season when conservative payout strategies led to more dividend misses. The stronger dividends toward the end of the season signal some confidence in the future outlook despite conservative guidance. However, firms that did have banked franking credits or capital in the bank from previous periods they went Oprah and handed out ‘special dividends’ like confetti. While this was met with shareholder glee, it does also suggest that firms cannot see opportunity to deploy this capital in the current conditions. That reenforces the views from point 2.

4. Winners and Losers – Performance

• • Growth Stocks Outperform: Growth stocks emerged as the clear winners of the reporting season, with a net beat of 30 percentage points. This performance was driven by strong margin surprises and the best free cash flow (FCF) surprise among any group. However, there was a slight miss on sales, which was more than offset by higher margins. Sectors like Technology and Health were key contributors to the outperformance of Growth stocks. Stand out performers were the likes of SQ2, HUB, and TPW.
  • Globally-exposed Cyclicals Underperform: Global Cyclicals were the most disappointing, led by falling margins and sales misses. The earnings misses were attributed to slowing global growth and the rising Australian Dollar. Despite these challenges, Global Cyclicals did follow the dividend trend surprised to the upside. Contrarian view might be to consider Global Cyclicals with the possibility the AUD begins to fade on RBA rate cuts in 2025.
  • Mixed Results in Other Sectors:
    • Resources: Ended the season with an equal number of beats and misses. Margins were slightly better than expected, and there was a positive cash flow surprise for some companies. However, the sector faced significant downgrades, with FY25 earnings now expected to fall by 3.2 per cent.
    • Industrials: Delivered growth with a nine per cent upside in EPS increases, although slightly below expectations. Defensives drove most of this growth, insurers however such as QBE, SUN, and HLI were drags.
    • Banks: Banks received net upgrades for FY25 earnings due to delayed rate cuts and lower-than-expected bad debts. However, earnings are still forecasted to fall by around 3 per cent in FY25.
    • Defensives: Had a challenging reporting season, with net misses on margins. Several major defensive stocks missed expectations and faced downgrades for FY25, which led to negative share price reactions.

5. Future Gazing – Guidance and Earnings Outlook

• • Vigilant Guidance has caused downgrades: As expected, many companies used the reporting season to reset earnings expectations. About 40 per cent in fact provided forecasts below consensus expectations, which in turn led to earnings downgrades for FY25 from the Street. This cautious approach reflects the uncertainty in the economic environment and the potential for slower growth ahead, which was reflected in the FY24 numbers.
  • Flat Earnings Forecast for FY25: The initial expectation of approximately 10 per cent earnings growth for FY25 has completely evaporated to just 0.1 per cent growth (yes, you read that correctly). This revision includes adjustments for the treatment of CDIs like NEM, which reduced earnings by 2.8 percentage point, and negative revisions in response to weaker-than-expected results, guidance, and lower commodity prices. Resources were particularly impacted, with a 7.7 percentage point downgrade, leading to a forecasted earnings decline of 2.8 percent for the sector.
  • Gazing into FY26: Early projections for FY26 suggest a 1.3 percent decline in earnings, driven by the expected declines in Resources and Banks due to net interest margins and commodity prices. However, Industrials are currently projected to deliver a 10.4 percent EPS growth, would argue this seems optimistic given the slowing economic cycle.

6. The Consensus

• • Downgrades to 2025 Earnings: The consensus for ASX 300 earnings in 2025 was downgraded by 3 per cent during the reporting season. This reflects a broad range of negative revisions, with 23 percent of stocks facing downgrades. Biggest losers were sectors like Energy, Media, Utilities, Mining, Health, and Capital Goods all saw significant consensus downgrades, with Media particularly facing downgrades as budgets are slashed in half. Flip side Tech, Telecom, Banks, and Financial Services, saw aggregate earnings upgrades. Notably, 78 percent of the banking sector received upgrades, reflecting some resilience in this group.

7. 7. Cash Flow and Margin Surprises

• • Positive Cash Flow: Operating cash flow was a positive surprise, with 2 percentage point  increase for Industrial and Resource stocks reporting cash flow at least 10 per cent above expectations. The main drivers of this cash flow surprise were lower-than-expected tax and interest costs, along with positive EBITDA margin surprises.
  • Capex: There were slightly more companies with higher-than-expected capex, but the impact on overall Free Cash Flow (FCF) was modest. Significant positive FCF surprises were seen in companies like TLS, QAN, and BHP, while WES, CSL, and WOW had negative surprises.

8. Final nuts and bolts

• • Seasonal Downgrade Patterns: The peak in downgrades typically occurs during the full-year reporting season, so the significant downgrades seen in August are not necessarily a negative signal for the market. As the year progresses, the pace of downgrades may slow, and there could be some positive guidance surprises during the 2024 AGM season. However, with a slowing economic cycle, the likelihood of positive surprises is lower compared to 2023.

Overall, the reporting season highlighted the resilience of the Australian economy and the challenges facing certain sectors. While Growth stocks outperformed, the outlook for FY25 remains cautious with flat earnings growth and sector-specific headwinds. Investors will need to navigate a mixed landscape with potential opportunities in contrarian plays like Global Cyclicals, but also be mindful of the broader economic uncertainties.