ASX stocks that beat earnings expectations: History says hold your winners

Reporting season is one of the most exciting yet terrifying times for investors. However, history suggests that companies often meet or exceed market expectations.

According to Bell Potter's Richard Coppleson, over the past sixteen reporting seasons:

• 28% of companies beat earnings expectations
• 23% missed expectations
• Almost 50% reported in-line results

In terms of how the companies performed on results day:

• Companies beating expectations saw an average rally of 5.2%
• Those missing expectations experienced an average decline of 6.3%
• In-line results led to a modest average increase of 0.3%

History says hold your winners

While stocks that beat earnings expectations typically gain 5.2% on results day, winners tend to extend their gains, up an average 6.7% four months later.

"Buy the stocks that are up on day one (or more importantly, don't sell them after a big move to the upside (shorts will need to cover over the next few weeks)," says the Coppo Report.

And that makes sense right?

If the company is reporting numbers that are above what's already priced in – then its price ceiling should be somewhere above where its currently trading.

The strength of the domestic consumer was a dominant theme during February reporting season. Nick Scali (ASX: NCK) was one of the first retailers to report its half-year FY24 earnings and the stock quickly re-rated as much as 30% post-earnings. Here are the key highlights from the result (vs. Macquarie estimates):

• Revenue down 20.2% to $226.6 million vs. $231.1 million est (1.9% miss)
• Net profit after tax down 29% to $43.0 million vs. $41 million est (4.9% beat)
• Gross margin up 360 bps to 65.6% vs. 64.0% est (280 bps beat)
• Interim dividend unch at 35 cents per share vs. 27.9 est (25.4% beat)

Nick Scali shares surged 16.5% on results day (6 Feb) and added another 5.9% the following day. The post-earnings momentum continued, with returns peaking at 33.5% on 26 April. Four months after the initial results announcement, the stock maintained a 17% gain.

The magnitude of the beat

The magnitude of an earnings beat is crucial – think of it this way, a modest earnings beat calls for a mediocre re-rate. However, when a company delivers results that substantially exceed expectations, it often triggers a significant re-rating.

Nick Scali delivered a solid 4.9% net profit beat, but the standout was its impressive 280 bps gross margin beat and significantly larger-than-expected dividend.

And as we all know, Aussie investors love their dividends.

A few other names that knocked it out of the ballpark include (with share price charts below):

• Audinate (ASX: AD8): 1H24 revenue and EBITDA was a respective 10% and 20.2% ahead of consensus expectations. The average target price among six brokers was increased by 21.8% after the result to $19.29.
• Imdex (ASX: IMD): 1H24 revenue, EBITDA and net profit beat consensus by 7.8%, 9.7% and 31.7% respectively. The company's EBITDA margin beat Macquarie estimates by 130 bps. The analysts upgraded their target price by 18% to $2.45 and hiked FY24-26 EPS assumptions by 6-11%.
• Wisetech Global (ASX: WTC): Revenue and net profit beat consensus by 1% and 24% respectively. Wistech also declared a 7.7 cents per share interim dividend vs. Citi expectations of 5.8% (so a 32.7% beat). The company also upgraded its EBITDA margin range due to the stronger-than-expected first half.

Why momentum carries on

The period immediately following the result is just as crucial as the reporting date itself.

Analysts almost universally raised their target prices for Audinate after its February result, with several citing the company's competitive moat, improved supply chains and traction in new business segments. Here's a summary of how analysts responded to the result:

• Canaccord: Audinate has a history of exceeding expectations, all metrics in the half-year beat expectations. Raised target price from $14 to $20 and maintained a Buy.

• Jefferies: Strong beat, higher-than-expected opex offset by strong top-line growth, expects to see video segment deliver +40% growth in FY24. Raised target price to $19 from $17 but maintained a Hold rating due to valuation.

• Morgan Stanley: Sees Audinate's leadership position as strengthening, sees above-peer margins and longer-term EBITDA margins of +50%, sees significant structural penetration tailwinds medium term. Raised target to $22 from $13.3, with an Overweight rating

As you can see, the stock was hit with a wave of positive commentary, target price upgrades and positive earnings revisions.

The one thing you have to watch out for is when the momentum begins to fade. For Wisetech and Imdex, the stocks settled above pre-reporting levels. Audinate, however, has completed a full cycle, returning to trade at levels similar to those seen in early February.

This article first appeared on Market Index.

Reporting Season Calendar

As part of Livewire and Market Index’s August Reporting Season coverage, we’ve created a handy PDF calendar, which can be downloaded below.