Morgans has identified 35 potential surprises this ASX reporting season - here's 6 of them

Stockbroking and wealth management firm, Morgans, recently put out its meaty reporting season playbook. In this wire, we’ll summarise some of the key themes they’re watching and why, as well as a handful of the stocks the Morgans analysts like (and a couple that they don’t).

Background

The backdrop of the upcoming earnings is one of uncertainty around interest rates (although yesterday’s CPI data provides a little more clarity). Still, Morgans prefers to lean on the data, saying “reporting season is not a time for investors to shy away”.

The team points out that over the past 20 years, August has seen positive returns 65% of the time, with stocks in healthcare, industrials and REITS delivering positive returns an even better 75% of the time.

The team is also keen to point out that the market has defied expectations when it comes to weathering the impacts of higher interest rates. According to their calculations, the ASX200 is forecast to return to 5.8% earnings growth in FY25, after a 3.5% decline in FY24.

Morgans identifies the following key sectors contributing to the growth: IT, Industrials, Communications, and Consumer Discretionary.

It follows that Morgans is all about picking stocks, not the market, adding that with lower stock correlation and increased divergence in stock performance, company selection is paramount in maximising returns.

“While the macro will remain a key focus, we think a window is opening up for stock/sector selection opportunities," analysts said.

In our view, the best risk/reward trades remain long small-cap cyclicals and REITs using defensive names as a funding source".

Stock selection is reinforced for Morgans when considering that median ASX industrial (ex-Financials, REITs, Utilities) valuations are pushing 22.8x 12-month forward PE, at 9% growth.

“In the absence of earnings surprises valuation will put a cap on upside”, notes the Morgans' team.

So, with stock picking in focus, which stocks do Morgans think are hot heading into reporting season, and which do they think are not?

WHAT'S HOT?

GQG Partners (ASX: GQG)

I recently put together a wire highlighting the fund managers and analysts who like GQG and the reasons why. Now you can add Morgans to the list, believing GQG will deliver a strong result on all fronts.

The team goes on to say that while it’s fairly obvious the results will be good, upside surprise could still come from potential performance fees (Morgans is above consensus) and the operating leverage that comes with FUM growth.

Interestingly, Morgans also likes listed fund managers Qualitas (ASX: QAL) and Regal Partners (ASX: RPL) heading into reporting season.

Lovisa (ASX: LOV)

Morgans sees Lovisa as “executing well” and notes that the company has delivered positive reporting surprises on five of the last seven occasions.

“We think there is a good chance of another positive surprise, especially on the basis of positive like-for-like (LFL) sales growth and potentially higher gross margins”, notes Morgans.

The only potential downside? Lovisa’s store rollout has been slower than expected but the market is aware of this, according to Morgans.

Guzman y Gomex (ASX: GYG)

Morgans is bullish on new market entrant GYG, believing that the Mexican fast food chain enjoyed a strong end to the year, punctuated by publicity from the IPO, and its recent marketing campaign focusing on “clean” eating.

“We wouldn’t be surprised if it slightly beats its FY24 prospectus forecast”, says Morgans.

WHAT'S NOT?

Corporate Travel (ASX: CTD)

Morgans has slapped a “soft trading update” on CTD, believing results will come in at the lower end of FY24 guidance.

“We think FY24 EBITDA is now likely at the lower end of guidance of A$210-230m given the UK Bridging contract has effectively stopped with the UK election being called early”, says Morgans.

Pro Medicus (ASX: PME)

This one is all about valuation risk, according to Morgans, noting that the stock is trading at historical highs and that “either a convincing result beat and/or outlook commentary may require a bit more colour to sustain valuation”.

Morgans notes that there is no risk to the outlook being anything other than positive, but this is typical for the biotech company. No guidance is anticipated either.

Seek (ASX: SEK)

Based on Morgans’ data, they see job ads down 18% in FY24, “with the June quarter down 19.6% on the prior corresponding period”. As such, they will be watching for Seek’s ability to pull the pricing level to offset the volume weakness.