ASX reporting season: Look for earnings quality and strategic clarity
Earnings season is coming up for ASX investors. Following is what to look for…
• Companies face sustained pressure from high rates
• JB HiFi and Wesfarmers’ Kmart focus points.
ASX-listed companies will reveal their half year results in the coming weeks – and investors should be looking for high quality earnings and consistent messaging from company CEOs.
The consensus view that Australia is entering a rate cutting cycle has seen momentum return as the dominant market driver.
As a result, many ASX-listed companies are trading at or near historical highs on the back of an improving outlook for earnings.
Given that backdrop, there will be a lot of focus on commentary around trading in January and into February.
Much of the market has quite a short time horizon – and given market positioning we expect elevated share price volatility on results days.
We focus on the medium to long term and try to use the results season to get deeper insights into what is changing within companies.
We want to find out more about their strategic direction and understand the rationale behind capital investments. All these factors are key to long-term outcomes.
Here’s a quick summary of the two main factors to look out for in results:
One: Consistent messaging
Consistent messaging on strategy is important this earnings season.
Have there been any significant changes in terms of what they’re spending their money on?
Are they extending outside of the areas of core competency?
You might see softer language around timing and quantum of the benefits of a project.
Sometimes a company places its focus on one part of the business or strategy and in the next reporting period on something else.
That might suggest that what was highlighted six months ago hasn’t gone to plan.
Two: Earnings quality
The second thing to focus on is earnings quality.
High quality earnings are backed by cash flow.
Check that earnings haven’t been helped by the release of provisions, increasing rates of capitalised expenditure and that there’s not a lot of non recurring or significant items excluded from the underlying result.
Poor or deteriorating earnings quality can be a good lead indicator of future earnings pressure.
Look for rates resilience
Both factors are particularly relevant after two and a half years of higher interest rates which have heaped pressure on consumers and corporate profit margins.
And the longer that rate hiking cycle goes, the harder it gets for corporates to deliver reasonable results.
Earnings quality can start to deteriorate as companies pull a few levers hoping to support profits until economic conditions improve. Corporates just stretch a little further to deliver results.
Look at the consistency of messaging over time and at earnings quality as a way to frame results.
This might present a different picture than looking at short-term profits.
Case studies
The performance of retailers JB HiFi and Wesfarmers’ Kmart business will be focal points this earnings season after two and a half years of rate pressure on consumers.
JB HiFi (ASX: JBH)
This business has been one of the standout performers in the retail space.
JB HiFi had a very strong share price performance over the 2024 calendar year.
Part of that is the market gaining confidence that JB will show strong earnings growth in 2025.
Another driver is expectations that the company will be a beneficiary of a wave of new consumer products hitting the market from the developments in artificial intelligence.
There have been mixed indicators from global electronics retailers on this benefit over the last few months. It will be a focus area for investors in the JB HiFi result.
Kmart (Wesfarmers, ASX: WES)
The performance of Anko, Kmart’s home brand, may not make a major impact on conglomerate Wesfarmers’ bottom line, but it will be closely watched.
Anko has been a key driver of Kmart’s recent success – 85 per cent of products sold at Kmart are now Anko.
That has plenty of benefits because Kmart gets complete control over product development and increased scale, which flows through to lower prices to customers.
Over the past 12 months management has started saying they’re looking to take the Anko brand global, partnering with different retailers.
If they can show they’re getting real traction offshore, it could be a very interesting medium to long term story for Kmart and Wesfarmers.
Source: Perpetual
