I think more than ever before, earnings season is going to represent a volatile time on the ASX. Investors are looking everywhere for good shares to buy in what has become a very unpredictable market. As such, often companies that deliver decent earnings reports see a rise in their share prices.
Earnings season begins in August. I think the following are solid shares to consider picking up before the end of July. I believe these companies are likely to report strong earnings, which may see them deliver reasonable increases in their share prices.
In the mining space, there are two sectors that have done remarkably well during H2 FY20. These are iron ore and gold. Having said that, I feel most of the ASX gold miners are currently priced far too high to consider buying.
Instead, in the iron ore space, I believe Fortescue Metals Group Limited (ASX: FMG) is a solid share to consider buying in July. This is because Fortescue is presently a pure play iron ore producer. BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO), on the other hand, both produce commodities in addition to iron ore that I feel will be a drag on their overall earnings.
During coronavirus lockdowns, the iron ore price actually rose. Today it is at a higher spot price than it was at the start of the pandemic. In Fortescue’s Q3 FY20 report, it declared record third quarter iron ore shipments which were up 10% on Q3 FY19 as well as record tonnages for the year to date. In addition, the company also reported a reduction in costs of 2% for the quarter.
Fortescue and the other large iron ore producers were also aided by continuing production troubles with Brazil-based iron ore leader, Vale.
In the medical supplies space, I believe Ansell Limited (ASX: ANN) are great shares to buy ahead of earnings season. We have not heard a lot from this company since the release of its H1 FY20 report in February. The company produces a wide range of personal protective equipment (PPE) that has seen unprecedented demand during the coronavirus pandemic. Global demand for the company’s protective gloves and surgical masks has been particularly strong.
Ansell’s H1 report highlighted the important role the company is playing during the pandemic in supplying PPE around the world. Particularly in China where Ansell is working with authorities to fast track its regulatory and import process in order to expedite supply.
Ansell improved its earnings before interest and taxes in H1 by 4.3%. However, this relatively modest increase was affected by one-off costs relating to restructuring; including asset impairment and costs of the company’s transformation program totalling USD$26.9m.
Both of the companies highlighted above have been able to prosper during the pandemic. I believe they represent solid shares to buy prior to earnings season as they are likely to surprise the market. Fortescue is currently selling at a price to earnings (P/E) ratio of 5.89. This is less than half the P/E ratios of BHP (13.29) and Rio Tinto (13.83).
Ansell, on the other hand, already has a high P/E ratio. However, I expect the company to report truly stellar earnings come August. Moreover, this time its reporting won’t include the once-off costs of the transformation program and will reflect the unprecedented demand for its PPE.
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Motley Fool contributor Daryl Mather owns shares of Fortescue Metals Group Limited. The Motley Fool Australia has recommended Ansell Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.