FY23 Reporting season - A wrap

Reporting season is over for another year and as always there were plenty of talking points. As has been expressed a number of times now, Stockopedia is a wonderful resource during this enlightening time of year.

Broad themes:

• Across the board it would appear that profit expectations for FY24 are pulling back. Depending on which consensus source you use, profit expectations have eased by some 5% - 8% for the broader market.

• This is likely due to a combination of higher interest rates, the rising cost of doing business, the impact of a more cautious consumer and of course what is happening out of China (especially for our non-Gold miners)

• As expected margins were the big issue with many companies recording sales growth, however not able to curtail costs that are still rising and unlikely to abate soon.

• Unlike the US quarterly earnings season where there were a majority of beats vs misses (refer to the Momentum Monday articles for more commentary) we had a more even spread of stocks that either beat or missed expectations.

• The XJO (ASX200) fell over the month of August by 1.4%. This compares to Small Ordinaries (ASX300 minus the top 100) which fell 1.5%. Either way, this was a relatively fair reflection based on what we saw. Dividends would also have helped investors in the big end of town.

XJO vs XSO (August 2023)

All these points have been covered extensively in other forms of media, so we now look to the StockRanks to see how they moved this latest earnings season and we chose to focus on the ASX200. Why? Because they often contain more complete data sets, are better covered by analysts and the vast majority of investors have their portfolios made up with these names. You can of course monitor every stock within the program to see how they moved, but for the purposes of this exercise we will stay with the bellwethers.

It is of course important to remind you that having a list of companies that either beats or misses expectations is just the market behaving normally. Therefore we can often put too much emphasis on specific moves (especially the negative ones). Our job as money managers is to try to get the odds in our favour, so that overall, the portfolio does well. And amongst high ranking stocks that seemed to be the case.

About the ASX200 Factor change report

We have compiled a list of all the Factor changes for every stock in the ASX200 this reporting season. The report was compiled once all companies due to report had done so, therefore Factor scores may have changed since then.

“Why do we measure the gravity of change in a Factor rather than the absolute number itself?”

To answer this I provide the following example. Say I had two companies and both had a StockRank score of 70. On the surface they would look both as equal performers. However, if I told you that for one company the score had improved from 50 to 70, yet for the other the score had fallen from 90 to 70, that would definitely change the perception. Often it is the direction of the Factor move that tells you more about a company's performance than the absolute number itself.

In theory we want to be in stocks that are improving their Factor scores relative to the market. Or if they already Ranked highly, at least have maintained that position.

In order to measure the gravity of change we use this key:

Statistics

Looking at the overall StockRank scores and this reporting season we saw more upgrades than downgrades in the ASX200, with the largest group of companies retaining their position.

As the StockRank score is a relative system between 100 and 1, a general improvement up would indicate that the ASX’s largest stocks did better than the smaller ones this earnings season. As you would expect, most moves were modest, however we did have some big swings in businesses where their StockRanks moved significantly.

When we start to delve into each individual factor we learn a little more.

Looking at the Quality score for example. It showed us more improvements than deteriorations. Again implying that from an operational perspective FY23 was a good year for the larger companies on our exchange.

The other interesting thing to note is that we often say that reporting season is when we see the biggest moves in the quality score as normally throughout the year it is quite dormant. Yet this year, most quality scores remained flat implying that in the majority of cases, if a company had good or bad quality ratios before they reported, more often than not they tended to stay that way. This supports the view that 'Good performance begets good performance, and bad performance tends to stay that way.’

Looking at the gravity of shifts either up or down, the majority of moves were in the 5 to 15 ranges, however there were a significant portion of stocks that recorded sizable moves. This generally means that when a company did well, it shot the lights out, whereas when a company did poorly operationally it really missed the mark.

Value on the other hand, saw a larger amount of falls in Value Ranks than rises . This implies that after this reporting season the ASX200 became more expensive. Therefore those seeking value will find it more difficult amongst our largest names at the minute.

However when we look at the shifts, the gravity of change tended to be more modest with the majority of moves being confined to the 5 - 15 category.

Finally, we finish with our most volatile Factor, Momentum.

Pleasingly we saw more ups than downs in the Momentum calcs. With approximately a third in each of the categories of up/down/flat, it would appear that we are currently in a ‘normal’ market for large caps.

(Note: remember the Momentum Factor score also considers changes in analyst estimates as a major component of the calculation - not just price)

We did see the largest amount of aggressive swings in this Factor. Reasons will likely be attributed to:

1. Reporting season often sees big swings in prices

2. As we include the change in analyst estimates it can often increase the magnitude of the Factor swing eg Price goes up AND analysts revise their estimates up amplifies the positive result. Vice versa for a poor result.

Summary

This FY23 reporting season was one where as a collective, the large caps performed better than smaller caps. This would make sense given the current economic landscape.

Notwithstanding this, most behaviour remained orderly as identified by the stable Quality scores, and while Momentum did its usual bit by swinging around, it is no different than is usually the case.

All in all, a normal reporting season - Carry on. Nothing to see here.

We discussed the findings including stocks in our recent Friday Lunch 'n Learn session. You can watch the recording here

If you have not already accessed your copy of FY23 Reporting Season Review you can download it here.

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