ASX reporting season: Dip buying fails to deliver returns

Food for thought: Tough crowd and brokers notes

Not the best time to miss

February was a very difficult month for equity markets. The narrative has quickly shifted from disinflation and interest rate cuts in the second half to stickier-than-expected prices and no cuts until 2024.

The path of least resistance for markets after a euphoric January and aggressive repricing of interest rate expectations was towards the downside, with the ASX 200 falling 2.9% last month.

Bearish narratives such as downside risk to earnings, geopolitical tensions and higher-for-longer interest rates meant that this was not the reporting season to miss market expectations.

As Morgan Stanley notes, companies that missed earnings were punished more heavily than previous reporting seasons (from August 2016 onwards).

• Average earnings miss fell -3.9% vs. average fall of -2.1%
• Average earnings beat rose 2.2% vs. average gain of 2.5%

When brokers run the ruler

The initial miss might cause a knee jerk reaction but what about the next day? Or the following week?

Brokers typically revise their ratings and target prices within 24 hours of the result. As you can imagine, a bad miss might trigger a rating and share price downgrade, which is another negative catalyst for investors and institutions.

Here are a few examples from the 'down and down again' list:

• Temple & Webster: First-half result earnings beat but offset by a poor trading update/outlook. It's a half-and-half split for Buy and Hold ratings among 12 brokers. Although the average price target was cut by 9.3% to $5.62. It still suggests upside but brokers are quite cautious.
• Domino's Pizza: First-half earnings was a sizeable miss alongside weak outlook commentary. Among 16 brokers, 56% were Hold rated for Domino's. Commentary was filled with uncertainty, with Credit Suisse expecting 2023 to likely be a pause for growth but "unclear how long slower growth will last." The average target price was cut by 15.1% to $61.30.

On the flip side:

• BlueScope Steel: First-half earnings were softer-than-expected and compounded by a weak second-half guidance. Despite the miss, 69% or 9 brokers remain Buy rated. The average target price was lowered by 2.2% to $20.40.
• Qantas: First-half results were in-line with expectations and analysts pointed out how the negative share price action was surprisingly and likely overdone. Across 15 ratings, 87% were Buy rated and the average target price increased 2.1% to $7.92.