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Australian Earnings Season Overview: A Mixed Bag of Results
As the August reporting season draws to a close, Australian companies are demonstrating a stronger-than-expected performance, with a net earnings beat of 7% to date. This contrasts sharply with the 2% miss recorded at the same time last year, as reported by Macquarie.
However, while the headline figures look promising, the underlying dynamics present a more nuanced landscape for investors, who must navigate a selective market.
The Real Indicator: Dividends
One of the key takeaways from this reporting season is not just the earnings beats but rather the substantial dividend surprises, which are currently at 20%, far outpacing the earnings surprises. Companies that reported last week with notable dividend increases include:
- Brambles (ASX: BXB)
- Seek (ASX: SEK)
- The Lottery Corporation (ASX: TLC)
- Lendlease (ASX: LLC)
- Downer EDI (ASX: DOW)
This trend towards dividend generosity points to a positive outlook from management, despite soft guidance provided by many firms for FY26.
Additionally, some companies like JB Hi-Fi (ASX: JBH), Super Retail Group (ASX: SUL), ARB Corporation (ASX: ARB), and Helloworld (ASX: HLI) are returning extra value to shareholders through special dividends.
A Focus on Domestic Exposure
Investors appear to favour companies with a domestic focus, leading to an outperformance of domestic cyclicals by approximately 8 percentage points over their global counterparts. The domestic cyclicals recorded a 2% increase, while global counterparts fell by 6%.
This trend highlights a preference among investors for the prospects of the Australian economy, counteracting the challenges faced by globally-exposed companies impacted by tariffs and geopolitical issues. Notably, domestic cyclicals surprised the market with a significant 45% positive free cash flow surprise, in stark contrast to the 8% negative surprise reported by global cyclicals.
Banking Sector Gains from Market Rotation
The ASX 200 has consistently reached new highs during the reporting season, despite some earnings downgrades for major companies like James Hardie (ASX: JHX), CSL (ASX: CSL), and Sonic Healthcare (ASX: SHL). This indicates that market performance is currently influenced more by liquidity and expectations of interest rate cuts rather than earnings projections.
Banks were key beneficiaries of this trend, outperforming by nearly 4% as investors shifted away from struggling sectors, with other "stage 1 recovery" stocks potentially facing continued challenges, including Endeavour Group (ASX: EDV), SkyCity Entertainment (ASX: SKC), and Domino’s Pizza (ASX: DMP).
The Significance of Guidance
The guidance provided by companies remains a critical factor in determining post-result share price performance. There is a notable 59% correlation between guidance and stock performance in the early weeks of reporting. While soft guidance is common during this period, companies that miss estimates by over 2.5% are experiencing pronounced market penalties.
Recent updates revealed only two positive guidance revisions—Charter Hall Retail and Hansen Technologies—amid six significant misses from key players, including James Hardie, Sonic Healthcare, and BlueScope Steel (ASX: BSL).
Quality Over Momentum
Investors are increasingly leaning towards quality stocks, seeking firms with robust "Rule of 40" metrics, which consider revenue growth and free cash flow margins, alongside experienced management teams. This focus on quality appears to be a defensive strategy amidst elevated price-to-earnings ratios. Interestingly, stocks with lower short interest are outperforming, suggesting a diminished appetite for contrarian positions.
Sector Performance Disparities
Financial services are shining through, delivering strong earnings surprises and upgrades, securing their status as the leading sector. While some insurers are displaying positive earnings trends, their share price performance has lagged due to strong year-to-date gains.
Conversely, the materials sector has suffered, underperforming by an average of 10%, with substantial declines noted in major healthcare stocks like CSL and Sonic Healthcare.
Looking Ahead
As the reporting season shifts into its latter stages, Macquarie favours stocks with a domestic focus and positive momentum, including:
- Regis Healthcare (ASX: REG)
- Australian Finance Group (ASX: AFG)
- Qantas (ASX: QAN)
- Harvey Norman (ASX: HVN)
These selections encapsulate the prevailing themes of domestic commitment and quality seen throughout this reporting period. Analysts suggest that conservative guidance may have set a low benchmark for FY26, creating opportunities for earnings upgrades as domestic economic conditions stabilise and potential rate cuts by the RBA take effect.
