How did your stock portfolio fare during the latest reporting season?
Were your shares buoyant from an optimistic 2024 outlook? Were they hammered after awful financials?
Believe it or not, one professional investment outfit reckons August 2023 was a bit of a disaster for S&P/ASX 200 Index (ASX: XJO) businesses.
And this means that investors need to take caution with their expectations for the coming period.
Just a terrible reporting season
Ophir co-founders and portfolio managers Steven Ng and Andrew Mitchell, in a letter to clients, said their favoured reporting season observation is revisions to the full financial year earnings.
"The market is forward looking, so what it thinks about the future prospects of a company is usually more meaningful than the historical results it just posted."
And by this measure, last month was a car crash for ASX 200 shares.
"No matter how you slice it, it was a tough reporting season for listed corporate Australia in aggregate," the letter read.
"The August 2023 reporting season (for June 2023 full financial year results) was the third worst this century, with a -2.6% downgrade. In dollar terms, $4 billion was slashed from expected FY24 profits."
Yikes.
Where the ASX 200 companies were let down
So why were the outlooks so terrible for Australia's most prominent public companies?
According to Ng and Mitchell, revenue wasn't to blame.
"They were upgraded for FY24 off the back of resilient nominal GDP growth and a consumer with excess savings still stuffed in their wallets.
"Wesfarmers Ltd (ASX: WES), Coles Group Ltd (ASX: COL) and Woolies [Woolworths Group Ltd (ASX: WOW)] collectively chalked up about $2 billion of revenue upgrades."
The problem was spiralling costs.
"Higher wages and interest costs are crunching margins," read the letter.
"Minimum wage hikes and super increases were called out by many, including JB Hi-Fi Limited (ASX: JBH) and drinks-and-pokies retailer Endeavour Group Ltd (ASX: EDV)."
The portfolio managers called supermarket chain Coles "a microcosm" of the general ASX 200 reporting season.
"It upgraded revenue by 2% but had profits downgraded by -10% as costs bite."
How to navigate the doom and gloom
All these pressures have resulted in a pretty gloomy forecast for the current financial year.
"Consensus ASX 200 corporate earnings growth is now a paltry -4% in FY24.
"If rate cuts don't come to the revenue rescue, 'cost management' is likely to become the catch cry of corporate Australia this financial year."
This is why the Ophir team is determined to hit the pavement and ask the hard questions of the executive teams at its ASX investments.
"The better performers in this environment are likely to have unique products or services that can drive resilient revenue growth, strong cost management to help maintain or grow margins, and low debt levels to help mitigate the impact of interest rate rises."
