Revenue growth remains healthy, with 73% of the companies reporting positive sales growth. Unsurprisingly technology stocks (software and computer services) experienced the most momentum in top line growth along with oil & gas and health care, whilst telecommunications and utilities stocks were more subdued.
Looking at earnings 48% of the companies reported an improvement, with oil & gas and technology companies seeing the most improvement. Whereas, telecommunications stocks were the main laggards at the earnings line.
Cost pressures, whilst evident across most sectors, perhaps can be best illustrated by the health care sector, with all companies reporting positive revenue growth but only 50% of the companies reported positive earnings growth after costs were taken into account. On that note, it shouldn’t come as a surprise that, relative to consensus estimates, 51% of the companies beat expectations at the revenue line but only 38% of the companies came in above consensus earnings estimates.
Retail Sector
February’s reporting season wasn’t all doom and gloom for Australian Retail stocks. As the table below highlights, approximately 50% of the companies came largely in line or beat estimates.
We did note that companies which are largely hostage to broader domestic economic growth (rather than product specific or structural growth drivers) are likely to face a challenging couple of years. The lower house prices are feeding into economic growth and we have now seen a slight uptick in the household savings ratio. Whether the slight improvement in the savings ratio is a sign of a more sustained deleveraging by the consumer is yet to be seen.
Overall, we see the environment less conducive for retail sales to outperform. Retail sales in Australia grew +0.1% in Jan19 (month-on-month), with Food sales moderating. This was evident in Woolworths and Coles recent results update as well.
Mining Sector
Whilst commodity prices did play some part in earnings growth, it was much more muted than in previous years. Instead this period’s earnings were driven by volume, product mix and movement in costs.
Rio Tinto (RIO), FY17 saw higher commodities prices significantly contribute to the growth in earnings (e.g. +21% jump in iron ore prices led to the iron division underlying earnings jump +45%). In FY18, volumes and mix did the heavy lifting to deliver a largely flat year-on-year EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) outcome in FY19. As called out at the half year results, cost pressures were evident throughout the year (energy, inflation and raw materials).
In BHP Group (BHP) results, the results were driven by generally lower commodity prices, higher costs and lower volumes. Cost and production were impacted by unplanned outages at Olympic Dam, WAIO, Spence and Nickel West.
Fortescue Metals (FMG) was the standout result in the sector, with the company also declaring a special dividend. Chinese steel mill profit margins moderated through the second half of 2018 calendar year. This resulted in increased focus on input costs and therefore increased demand for lower quality products. This saw the price differential between higher and lower quality product narrow over the period. On the back of this, FMG’s 1H19 underlying Net Profit after tax of US$644m was well above consensus estimates of US$539m.
