Macquarie's top stocks from each sector for earnings resilience

We get it. It's been a difficult few months for us investors. The S&P/ASX 300 has fallen nearly 11% year to date, while the S&P 500 has cratered 17.3%, as rising interest rates take their toll on some of our favourite stocks. 

So the August earnings season may just be a shot at some much-needed relief, right? 

Wrong, according to Macquarie. The investment giant believes there's more pain on the horizon, pointing to some of the major insights coming out of the US earnings season as proof. 

"US results are beating expectations, but the share of stocks missing is rising and is nearly three times what it was a year ago," Macquarie analysts wrote. 

"There are net downgrades to 3Q22, and post-result returns are driven by these earnings revisions." 

Based on the reaction to earnings results in the US, the investment bank believes that the June half results could come in above expectations. That said, there are still risks to the outlook, as central banks continue to tighten monetary support, and of course, inflation continues to hit consumers' wallets. Then there's the issue of COVID cases and hospitalisations continuing to tick up to (and beyond) peak numbers. 

Macquarie's top stocks for earnings resilience

So how should you position your portfolio? Glad you asked. In the investment bank's latest note, analysts wrote that earnings resilience is key, and pointed to one cracking stock from each sector (bar two) that could continue spewing cash even in the case of a recession. These include: 

Insurance: Steadfast Group (ASX: SDF)

While Macquarie's estimates are below consensus for QBE Insurance (ASX: QBE), Insurance Australia Group (ASX: IAG), Medibank Private (ASX: MPL) and Steadfast Group (ASX: SDF) for FY22 and FY23, it picked SDF as its favourite as it delivered better than expected EPS growth in 2020 (compared to QBE and IAG which cut EPS by two-thirds). MRE is below consensus for QBE, IAG, MPL and SDF in FY22 and FY23. SDF

Banks: No pick (however, the preference seems to be for CBA)

Why? Well, Macquarie is currently expecting an earnings miss from Bendigo and Adelaide Bank (ASX: BEN). With that in mind, it pointed to the Commonwealth Bank (ASX: CBA) as a bank that held up relatively better than its peers in 2020 - while Virgin Money UK (ASX: VUK) was the hardest hit. The key risk to earnings here is bad debts, Macquarie said. 

Diversified Financials: No pick (however, the preference seems to be for ASX)

Macquarie believes that market-linked stocks like Magellan Financial Group (ASX: MFG) are going to struggle given that it doesn't believe the market has yet bottomed. If it had to pick one, Macquarie points to ASX Ltd (ASX: ASX) as the stock with the most resilient EPS for FY23.

Real Estate: Goodman Group (ASX: GMG)

Macquarie expects fund managers like Goodman Group and Charter Hall (ASX: CHC) to deliver better earnings per share growth in FY23, as they did so in FY20. Meanwhile, companies like Lendlease Group (ASX: LLC) cut EPS by one-third. The investment bank sees rising yields (valuation headwind and rising interest costs) as the key risk for this sector, rather than leverage risks a la the GFC.

Consumer discretionary: The Lottery Corporation (ASX: TLC) 

Why? Well, Macquarie points to stocks like The Lottery Corporation, Dominos Pizza  (ASX:DMP) , IDP Education (ASX: IEL) and Corporate Travel (ASX: CTD) as companies it expects to outperform on the earnings front. Meanwhile, it points to Webjet (ASX: WEB) and Invocare (ASX: IVC) as stocks that it expects to underdeliver on earnings in FY22 and FY23.  

Communications: TPG Telecom (ASX: TPG)

Macquarie believes TPG Telecom can deliver above consensus EPS over the next financial year, with the company potentially materially exposed to the rise in electricity costs. It's below consensus on companies like Seek (ASX: SEK), REA Group (ASX: REA) and Domain (ASX: DHG). 

Technology: NextDC (ASX: NXT)

Macquarie isn't expecting good things on the earnings front for Xero (ASX: XRO) and Block (ASX: SQ2) and predicts below consensus EBITDA for the companies in FY22 and FY23. Instead, it prefers NextDC and WiseTech Global (ASX: WTC). 

Health: CSL Ltd (ASX: CSL)

Why? Glad you asked. Outside of the COVID crisis, the earnings per share of stocks like Fisher & Paykel Healthcare Corporation (ASX: FPH), ResMed (ASX: RMD) and Macquarie's pick, CSL, have typically been resilient in times of recession. In companies, while Sonic Healthcare may beat earnings expectations in FY22, Macquarie is below consensus for FY23. It believes Ramsay Healthcare (ASX: RHC) will miss estimates in its FY22 result. 

Consumer Staples: Coles (ASX: COL) 

Macquarie analyst expectations come below consensus for Woolworths (ASX: WOW) for FY23, even though earnings tend to hold up for food retailers and supermarkets in times of recession (benefiting the likes of WOW, Coles and Metcash (ASX: MTS), they wrote. As COL has more hedging/PPAs, it has taken out the top gong as Macquarie's consumer staples picks, helping it to combat rising electricity prices. 

Industrials: Transurban: (ASX: TCL) 

Why? Well, Transurban's earnings stood up in the FY09 recession. Other stocks Macquarie thinks could impress on the earnings front in FY22 and FY23 include Qantas (ASX: QAN), Cleanaway Waste Management (ASX: CWY) and Kelsian Group (ASX: KLS). That said, it's not all rosy for Qantas, Macquarie said, which did cut EPS during past recessions. It also expects beats from Downer (ASX: DOW) and Reliance Worldwide (ASX: RWC), while it expects a miss from Seven Group Holdings (ASX: SVW) in its upcoming result. 

Basic Materials: Amcor (ASX: AMC) 

Macquarie believes that Amcor's earnings would likely be resilient in the case of a recession, but it also points to Brickworks (ASX: BKW) as another resilient winner. It's also expecting good things from Boral (ASX: BLD), Adbri (ASX: ABC), and Nufarm (ASX: NUF) in FY22 and FY23. Analyst expectations are currently below consensus for Orica (ASX: ORI).

Mining: Newcrest Mining (ASX: NCM)

Macquarie points to Rio Tinto (ASX: RIO) as a stock to watch in FY22 and FY22, but notes its earnings estimates have come under consensus for the likes of Fortescue Metals Group (ASX: FMG), Mineral Resources (ASX: MIN) and Allkem (ASX: AKE). It prefers diversified miners and larger gold miners for resilient earnings during times of recession, which is why it picked Newcrest over the coming months. 

Energy and Utilities: Origin Energy (ASX: ORG) 

With the rest of the market clamouring over Woodside (ASX:WDS) and Santos (ASX: STO), Macquarie's estimates have come below consensus on these two oil giants, predicting a more conservative oil price outlook for the months ahead. Among these energy and utilities stocks, it points to Worley (ASX: WOR) and Origin Energy as the clear winners for FY23 (and on the latter, its estimates come in materially above consensus). 

Plus, the investment bank predicts corporate earnings will fall 8.9% by FY24

The investment giant also believes that earnings estimates are still far too high, with the consensus currently expecting earnings per share (EPS) growth from the S&P/ASX 300 of 10% or more in FY23. 

"Based on the last three US recessions, a 10% fall seems more likely," analysts wrote. 

"Health, Staples, REITs, Telecom and Utilities are the sectors where earnings are more resilient. For aggregate EPS to fall 10%, we would need to see >10% falls in other sectors, and the market is already pricing a large EPS decline for Resources. While negative EPS revisions picked up in June (-27%) and July (-25%), this is still half the EPS downgrades seen near a trough." 

Picking up on that point, the lows are still a long way off, Macquarie reckoned, arguing we still need to see a "trough in the cycle" or a peak in the cash rate before investors can start feeling confident again. 

In fact, while earnings had held up until recently in Australia, we are now into our second straight month of negative revisions. Now, 73% of industry groups in the ASX 300 have net downgrades so far in July 2022, Macquarie said. 

The hardest hit sectors have been insurance, transport, cyclical retail and diversified financials, while utilities, energy and banks have seen positive revisions in July 2022. 

Best and worst of recent earnings revisions

So which stocks have had the best and worst earnings revisions among small, mids and large caps? Glad you asked. 

Macquarie said that Aristocrat Leisure (ASX: ALL), Goodman Group (ASX: GMG), ASX Ltd (ASX: ASX), BlueScope Steel (ASX: BSL), Amcor (ASX: AMC) and Origin Energy (ASX: ORG) have seen net upgrades over the past three months, and could outperform over the months ahead. 

Meanwhile, Iluka Resources (ASX: ILU), Whitehaven Coal (ASX: WHC), ALS (ASX: ALQ), Ampol (ASX: ALD), Carsales.com (ASX: CAR) and Pilbara Minerals (ASX: PLS) are the mid-caps which have seen net upgrades in recent months and could outperform from here. Macquarie points to Reece (ASX: REH) as a stock with net downgrades over the past three months. 

Meanwhile, the smalls which have seen net upgrades in the past three months and could outperform from here include Elders (ASX: ELD), Viva Energy (ASX: VEA), Graincorp (ASX: GNC), Chalice Mining (ASX: CHN) and Perseus Mining (ASX: PRU). Macquarie points to InvoCare (ASX: IVC) as a stock with net downgrades. 

Conclusion

As Macquarie believes a US recession is on the horizon for early 2023, it believes companies with earnings resilience will continue to become more and more important to investors over the coming two years. Central banks tightening their purse strings has slowed growth, but it also drives EPS trends, analysts said, albeit with a lag of around 18 months. With this in mind, investors should expect to see further falls in earnings estimates over the next year. 

Asset Allocation

Macquarie reveals its 16-stock "recession-proof" portfolio

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