3 picks to navigate the earnings season minefield safely

This earnings season is shaping up to be a volatile one, with one-half of the market pricing in recession and the other half a soft landing. This makes for opportunity, but beware, it’s a double-edged sword. So far the REITs, particularly office REITs, have delivered some truly horrible results as companies struggle to get their staff back to the office, and the retailers (many founder-led) have managed to navigate the "recession-bound" economy well. 

Quality of management will be key because quality management has the map to navigate the minefield of running a business in a turning economy

Factors we are looking for:

• Improved margins
• Solid balance sheets
• Realistic outlook

While we will take a “wait and see” approach for most results, we are happy to hold our top picks into the earnings release and either add on weakness or add on strength.

Top picks

We have picked three companies from different sectors, all of which have solid track records of delivering on their promises. They all have quality management, fiscal discipline, and good growth prospects, in either scenario of soft or hard landing.

Judo Bank (ASX: JDO) – Australia’s newest bank, focusing on Small and Medium Enterprises (SMEs) has been a solid performer over the last few earnings seasons, beating expectations every time. 

While this one is unlikely to pay a dividend, it is sitting 30% below price consensus after seeing little recovery since the US regional banking crisis, which has little (if anything) to do with the way Judo operates. Judo runs a tight ship with higher Net Interest Margins (NIMs), lower Non-Performing Loans (NPL), and a better liquidity ratio than any of the Big Four Banks.

Expected Earnings Per Share (EPS): 6.9c

Expected FY Dividend: nil

Corporate Travel (ASX: CTD) - Corporate Travel gave a quarterly earnings update in mid-July where the company confirmed its FY23 guidance, doubling its profit. With Business travel volumes now back to pre-COVID levels, high margins, and no debt, the company is in fine shape to surge past 2019 levels.

The outlook should be very positive with two large contracts from the British Foreign Office and the Australian government starting in FY24. The British contract alone is worth $3.1 billion over five years while the Australian contract is still significant.

CTD also has impressive margins at 31.5% and a client retention rate of 97%!

Expected Earnings Per Share (EPS): 63.7c

Expected FY Dividend: 26.5c (1.40% dividend yield)

Pilbara Minerals (ASX: PLS) - Pilbara released their quarterly production update a fortnight ago and it was a stunning result, with increases in production and sales to record another record quarter. While group revenues declined 18% for the quarter due to lower prices, production costs remained consistent. That's a feat that few miners have been able to achieve in the last quarter.

With $3.3 billion in cash (24% of market cap) either a strategic acquisition or a good dividend is likely in the coming months.

Expected Earnings Per Share (EPS): 74.7c

Expected FY Dividend: 20.7c (3.90% dividend yield or 5.07% including franking)