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The good, the bad, and the ugly

Solid sales growth and a bounce back in overall profit are two key takeaways from the company reports released over February. However there was enormous variability between companies and sectors, and some very strong market moves – up and down – following individual company results.

A feature for investors is increased dividends, particularly from commodity stocks. The top 200 stocks will pay $72 billion in dividends for the half year. The strength of mining earnings is remarkable, but other sectors showed increases as well; healthcare, consumer services, financials and energy. This could see upgrades from analyst over the coming weeks.

So here’s my take on this reporting season. The following judgments are opinion only. This is not a comprehensive look at all stocks, but merely those with results that caught my eye. I’ll start with the good, then move on to the bad and the ugly.

The Good                                

There were a number of stand-out reports:

Bluescope Steel (BSL) shone. An 80% increase in net profit driven by a 200% lift in underlying earnings helped. Shareholders will receive a 33% larger dividend, and the management outlook for the second half of the year will show a 50% improvement over H2 2016. Which is just as well, given BSL’s share price doubled over the last nine months. Clouds remain over the long term outlook for the industry, but on valuation BSL looks cheap, trading at 10-11 times earnings versus the market average closer to 19-20 times.

Northern Star (NST) – the gold miner reported a 61% lift in net profit on lower costs and higher production. Not a fan of gold stocks generally, but the heightened risks of market disruption in 2017 may be a good argument for a holding some gold exposures as a hedge against hard times. This is my pick in the sector.

While we’re in the resource space both BHP and Beach Petroleum (BPT) also reported strongly.

Cochlear (COH) and CSL both once again demonstrated why so many investors hold these top quality Australian companies as core investments. Serum sales surged at CSL, and Cochlear’s expanded product range drove earnings. Lofty valuations make it hard to bite the bullet and buy, and some investors will prefer to wait for a (relatively rare) pull back.

Selected retail stocks did very well. JB HiFi (JBH - NPAT  + 16% and FY forecast +31-35%)  and Harvey Norman (HVN – NPAT + 39%) justified strong share prices with sector beating results. Both presented strong evidence that they are superior retailers. Similarly, Nick Scali (NCK) grew H1 profits by 45%. The other eye-catcher is Super Retail Group (SUL), taking the prize with a 66% lift in half-year profit.

The problem with many of the stocks that reported so strongly is their share prices. These earnings turnarounds were heavily foreshadowed, and with the exception of BHP and BPT most of the above are trading at or near multi-year highs.

I’m looking for an earnings turnaround in a company with a bombed out share price and a valuation argument. Vocus Group (VOC) was hit hard last year, and saw several senior departures. Despite margin concerns as customers transition to the NBN the company reported a 95% lift in H1 profit. The forward PE is around 12-13 times, and the share price is much closer to lows than highs. Additionally, there are a number of merger / takeover deals in the sector. This is the most likely addition to my portfolio as a result of reporting.


The bad and the ugly

There are a number of stocks at bombed out levels that may tempt investors. Bellamys (BAL) and Slater and Gordon (SGH) may be among them. However in my view neither showed signs of arresting share price slides that may be terminal. I struggle to make a bargain case here.

Post result trading in APN Media and Fairfax (FXJ) were among the more curious market reactions. Both reported profit increases, a welcome relief to shareholders. The problem is that both saw the long established slide in sales revenue continue, raising questions about sustainability of profit and long term prospects.

The most startling miss in my view is Brambles (BXB). The global logistics group saw profits slip 14%, despite exposure to the uptick in US economic activity. This provokes doubts about the strong rally in US shares – clearly not all companies are benefitting.

Seven Group (SVW) wrote down various costs and its SWM holdings, taking an underlying NPAT of 104 million into negative territory. While management talked up their portfolio of holdings in my view the prospects for its main businesses remain constrained. Interestingly, SVW is trading near 4 year highs. Possibly one for the short sellers to examine.

Rounding out the bad and the ugly is Iluka (ILU). It reported a $224 million loss and cut its final dividend. Write downs were a significant part of the loss, but underlying operations also delivered red ink. The best management could say about mineral sands markets was they saw signs of a fragile recovery. Not a buyer.

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