Amid big gains in Nearmap and Bendigo & Adelaide Bank after their earnings reports on Monday, and strength in BHP, Rio Tinto and Fortescue before their reports this week, the S&P/ASX 200 share index rose 0.9 per cent to 6868.9 points. It was the second-highest close in almost 12 months.Two weeks into the February profits season, greater than normal numbers of companies have beaten analyst forecasts for earnings and dividends, and expectations have been revised up after unprecedented fiscal and monetary support and vaccine developments since the pandemic.Nearmap surged 19 per cent on Monday as much better than expected earnings and cash flow and improved guidance on its annualised contract value triggered a squeeze of short positions taken on the back of J Capital Research short report last week. Bendigo & Adelaide Bank jumped 11.3 per as its interim cash profit beat the consensus estimate by 28 per cent, with bad and doubtful debts just 6 basis points of total loans versus expectations of 21. Bendigo’s interim dividend of 23.5c also beat expectations and it will pay a backdated final 2020 dividend of 4.5c a share. It noted an “improving domestic outlook among global uncertainty”.JB Hi-Fi rose 3 per cent even after tripling since March, with its second-half profit up 86 per cent on the COVID trend of “work from home”. The retailer was impacted by inventory shortages due to global demand and unable to give any sales or earnings guidance due to the uncertain effects of the pandemic. Still, Citi’s Bryan Raymond expects consensus earnings upgrades to continue, driven by the sales momentum in January and a solid uplift in profit margin for The Good Guys. “While working capital will need to normalise, the 65 per cent payout ratio and stable capex levels have enabled JB Hi-Fi to pay down substantial amounts of debt over the past 12 months,” he said.“We consider this to be an opportunity for a capital return or acquisition over the medium term.”Consistent with the trend in the latest US reporting season, COVID “winners” are more likely to beat than COVID “losers”, but the relative return after a beat is much higher for COVID losers — at 5.7 per cent — compared to an average gain of just 1 per cent for winners, according to Macquarie.“We again see this as a sign that investors should rotate to COVID losers,” said Macquarie equity strategist Matt Brooks.And broadly, he says it’s been a strong start to reporting season.Of the 31 results watched by Macquarie in the first two weeks of reporting, 52 per cent beat the broker’s half-year earnings estimate by 5 per cent or more and 23 per cent missed.“This is a solid beats-to-misses ratio of 2.3 times,” Brooks said.While the first week of reporting was always going to be hard to top — no companies missed his estimates by 5 per cent or more — the second week was also good, with 11 beats and 7 misses out of 24 results. Margins have been the main driver of earnings beats and most of the misses have come from stocks that had challenges before the pandemic, such as like Unibail, AGL, Telstra and CIMIC. As flagged by strategists ahead of the reporting season, the financials and resources sectors have dominated in terms of positive surprises, while real estate has been more disappointing.“The barbell (of financials and resources) is doing the heavy lifting,” Brooks said. “This is consistent with the trend since August 2020, where a rise in forward earnings has been driven by upgrades to resources and financials.”Overall, the upgrade cycle in consensus estimates for earnings continues and — unlike recent years — earnings per share beats are translating into upgrades for the current financial year.Of the 31 results in the first two weeks, Macquarie upgraded its FY21 earnings estimates by more than 5 per cent for 52 per cent and downgraded its estimates for just 16 per cent.Notable upgrades in the second week included CBA and the insurers Suncorp and IAG. After rising 1 percentage point in the past week, Macquarie’s “bottom up” EPS growth forecast for the Australian market in FY21 is now up 10.7 per cent. Falling bad debt estimates for the banks could drive further sector upgrades such that FY21 bank earnings growth outpaces the market, according to Brooks.
ASX S&P200 index chart (XJO)
As with the recent US reporting season, media and banks are also posting good results. Consumer services (travel and leisure) and energy are the only sectors with more misses than beats, but “these are key COVID loser sectors to rotate into on a 12-month view”, Brooks said. “The latest COVID scare in Victoria may create another buying opportunity in COVID losers.” With the latest OECD leading indicator data showing the US expansion continues to accelerate, he remains positive, with a preference for COVID losers, value, cyclicals, beneficiaries of higher bond yields (banks, insurers) and stocks with high domestic exposure, as rising commodity prices lift the Australian dollar. Australia’s 10-year bond yield rose 10 basis points to an 11-month high of 1.322 per cent on Monday, while the Aussie dollar hit a four-week high of US77.88c.With greater certainty around COVID impacts, vaccine developments and policy intent, the early signals “confirm a greater conviction to guide and generally confirm robust recovery pillars in place”, said Morgan Stanley equity strategist Chris Nicol.



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