The vast bulk of Australia’s public companies, finalise their financial-year accounts in June. Those that use the calendar year are ruling off their interim (half-year) reports.
The companies will then release their results in the main “reporting season,” which takes place in August, when the bulk of the stock exchange’s full-year results come out, and the interim results for the calendar-year crew.
This is reversed in February, when the June 30 year-end companies report their interim results for the six months to December 31, and calendar-year reporters bring out their full-year results. Westpac, ANZ Banking Group and National Australia Bank report interim results – for the half-year to March 31 – in May.
In the United States, reporting seasons seem to come around as quickly as elections – or to be as continuous as election campaigns. US companies report on a quarterly basis: each earnings season begins one or two weeks after the last month of each quarter (December, March, June and September).
The share market is on edge during reporting season, ready to punish companies that report bad results – or fall short of expectations – with savage share-price markdowns. Falls of 20% or more are often seen, which can wipe out months (if not years) of capital appreciation.
The flipside of this is that the market is just as ready to send the share price soaring if any aspect of an earnings report pleasantly surprises it.
Managing expectations
It actually does not matter so much what the result announced is in terms of up or down: what matters is whether the share market is expecting that direction of profit movement. In the weeks leading up to their reporting season, companies usually try to prepare the market for a profit rise or fall. This process is called “guidance,” which means the practice by which companies seek to manage the market’s expectations of their profit, either by giving specific forecasts themselves, or by commenting publicly on the forecasts posted by stockbroking and investment bank research analysts.
The move to guidance arose from a crackdown in 1999 by the Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange on selective briefings given to analysts. Traditionally, companies told analysts in these briefings whether their forecasts were accurate: if not, the analysts changed their forecasts and the altered expectation filtered out to the market. But ASIC and the ASX were rightly concerned that this practice breached the ASX’s continuous disclosure requirements, and suggested instead an informal system of guidance.
Providing guidance is neither a stock exchange listing rule nor a Corporations Law requirement: it is voluntary. Listed companies have important obligations around ‘continuous disclosure,’ which means that a listed company must immediately tell the market of any information concerning it that a “reasonable person would expect to have a material effect on the company’s share price.” Notwithstanding this, in July 2015, the ASX clarified its listing rules, saying that a listed entity “may decide whether or not it will provide any earnings guidance. The ASX has stated that it is perfectly acceptable for a listed entity to have a policy of not providing earnings guidance to the market.”
The market expects to see guidance from the Top 200 stocks, although some companies refuse to give it. For example, in June 2015 Woolworths’ chairman Ralph Waters admitted that the company’s guidance issued earlier in the year had been wrong – despite it being the management and board’s “best view of the business at the time” – and said the company had decided that it would not give guidance in the future.
In December 2015, corporate advisory firm McGrath Nicol’s annual study of earnings guidance found that only 49% of companies (of 104 listed companies in seven major sectors) provided earnings guidance in 2015. That was a decline from 57% in 2014 and 59% in 2013, as industry turmoil, a rise in investor class actions and new listing laws prompted caution among company boards.
In the confessional booth
However, the general move to guidance means that the market effectively has a ‘confession’ season before each reporting season. The main ‘confession’ season happens in April and May after companies see their results for the March quarter. If companies realise that they’re not going to meet the market’s profit expectations for the full year, they tell the market about it.
In practice, volatile business conditions mean that companies can flag big surprises they have coming, such as a writedown (a reduction in the value of what a company owns) or a ‘profit warning’ (a downgrade to its profit expectation) at any time. If the market is not expecting the company’s view to have changed, the shares will be sold off. Conversely, if it is a pleasant change of view, the opposite reaction is likely.
For example, rail group Aurizon, Australia’s largest rail freight operator, released an unexpected profit warning on 23 December 2015. The company might have been banking on investors, analysts and journalists having gone on their summer holidays, but the market noticed: Aurizon’s stock plunged 15% on the day of the profit warning.
The share market’s reaction can be even more emphatic than that. In April 2015, newly listed training and recruitment group Ashley Services revealed that it would fall short of the earnings estimates made in its initial public offering (IPO) prospectus. Ashley’s shares plummeted 55% in a day.
The big day – reporting season
It is not so much what numbers the company reports that decide how its result will be viewed by the share market, but how those numbers compare to expectations (analysts’ consensus forecasts) and the company’s prior guidance.
All of the company’s financial metrics – revenue, earnings per share (EPS), dividend per share (DPS), net profit after tax (NPAT), return on equity (ROE) – are scrutinised closely. The market focuses on ‘underlying’ profit, which removes potentially distorting one-off effects (for example, exchange rate movements, or the profit on the sale of a business) that may form part of the result announced for accounting purposes.
Analysts and investors are mostly looking whether the announced numbers meet, beat or fall short of the consensus expectation, and to what extent.
In the FY15 reporting season a year ago, 59% of companies lifted their net profit from the prior year, according to Shane Oliver, head of investment strategy and chief economist at AMP Capital. While that sounds like a strong overall result, it was the lowest such proportion since August 2009, in the depths of the GFC.
Likewise, while 43% of companies beat market consensus profit expectations in FY15, that proportion had run at higher than 50% since 2013.
57% of companies in Oliver’s sample lifted dividends, the first fall below 60% since the 2013 half-year profit-reporting season. Reflecting the slightly disappointing results and soft guidance, he says only 48% of companies saw their share price outperform the share market the day their results were released, the lowest proportion since February 2012.
Blue skies or clouds ahead?
It is no exaggeration to say that one of the most important parts of a company’s profit announcement is its outlook statement. Investors are at least as interested in the outlook statements as they are in the actual profit number reported. Optimism is rewarded (if it is realistic), but just as with downward guidance revisions, the market does not like a pessimistic outlook statement. The share market will accept even a seemingly poor result if (a) it was expecting it, and (b) the company in its outlook statement gives the market good reason to believe that a turnaround is on the way.
As always, the reverse is also true. In August last year, construction company Boral delivered its best result in seven years – a 45% rise in underlying net profit, to $249 million, well ahead of analysts forecasts, and a 20% boost to the dividend – but the share price fell by 6.5%. The problem was a disappointing outlook statement, which tipped flat earnings in the company’s core construction division.
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