The August earnings season will be unlike anything we have ever seen in our investing careers. It will be a moment of truth when we're able to find out what's been going on behind closed doors over the past four months. We all have an idea of where the problems are, but there are always surprises. I think the following trends will be very important for investors to think about while positioning their portfolios.
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Mass gatherings are still out
Clearly travel and tourism will be among the hardest hit sectors this earnings season. We have all seen the announcements about Qantas Airways Limited (ASX: QAN) reducing staffing levels and retiring aircraft. In addition, we all know other companies that have been smashed by the coronavirus pandemic include Webjet Limited (ASX: WEB) and Flight Centre Travel Group Ltd (ASX: FLT). However, during earnings season, these companies may still surprise on the downside. I think travel is likely to be a barren sector for at least the next two years.
One company I think is unlikely to see its share price fall, however, is Alliance Aviation Services Ltd (ASX: AQZ). This company recently forecast a year-end profit before tax of $40 million. If anything, I think Alliance has a chance of surprising the market on the upside.
Some other companies likely to report bad results during earnings season may include those exposed to retail real estate. In particular, Australian real estate investment trusts, or A-REITs, such as Vicinity Centres (ASX: VCX), Scentre Group (ASX: SCG) or GPT Group (ASX: GPT). For instance, GPT Group disclosed a re-valuation of 8 of the company's retail centres, slashing 8.8%, or $476.7 million, from its portfolio valuation due to the impacts of coronavirus. These companies, in particular, could surprise on the downside.
However, there are some real estate companies that may give the market cause to celebrate. I believe these are most likely to be companies focused on commercial real estate and self-storage. These include Centuria Office REIT (ASX: COF) and Abacus Property Group (ASX: ABP).
We may be seeing a shift from office to home-based work. Nevertheless, client leases in these two companies average 5.1 years and 4.4 years respectively. So even if their clients have downsized their office-based staff, they still have leases in place for now. In addition, both of these ASX shares have been sold down considerably. So much so, that I think there's a good chance the market will be surprised come August.
Online trading is now, not tomorrow
The transition towards online shopping during the lockdown is now a recognised phenomenon. Digital-native companies such as Kogan.com Ltd (ASX: KGN) and Temple & Webster Group Ltd (ASX: TPW) have given every indication of strong results. They may surprise on the upside, however I think their success has already been priced into their share prices.
Potential earnings season surprises may also come from discretionary retail shares. Specifically, Accent Group Ltd (ASX: AX1) has recently reported that earnings before interest, taxes, depreciation and amortisation would be around 10% higher than FY19. This is largely due to digital sales and a 7% increase in like-for-like sales.
Other retail companies I will be watching include Lovisa Holdings Ltd (ASX: LOV), City Chic Collective Ltd (ASX: CCX) and Michael Hill International Ltd (ASX: MHJ). Of these three, I expect City Chic to perform well. The company already had two thirds of its global sales via digital channels. I believe Lovisa and Michael Hill are likely to disappoint in terms of overall sales volume.
Earnings season for miners
Fortescue Metals Group Limited (ASX: FMG) is a pure play iron ore company that has benefitted greatly during lockdowns. Not only has the price of iron ore stayed strong, it has actually lifted. I expect this company to report solid results. This will be similar for all the larger gold mining companies. Of these, I think Regis Resources Limited (ASX: RRL) is likely to surprise on the upside, and is possibly the best choice of the established gold miners.
However, I'm not so sure about BHP Group Ltd (ASX: BHP). While iron ore has been very strong, other products like coal, copper and petroleum have seen production challenges and historically low prices. I think BHP will surprise on the downside, just as Rio Tinto Limited (ASX: RIO) may do for similar reasons.
However, even worse affected are likely to be the nation's LNG and oil producers. Despite horrible oil prices, and disclosures of companies changing impairments, investors are still buying these shares. Personally, I think the pandemic has hastened a structural shift in the market. Maybe that will become evident during earnings season.
The move to work from home is over
Several companies did very well from the transition to working from home. Companies like JB Hi-Fi Limited (ASX: JBH) in particular reported strong results in June. However, I'm not sure this can continue into FY21. Personally, I needed one desk, one monitor and one chair. I am unlikely to need more than that for a year or so.
The same could be said for the retail arms of Wesfarmers Ltd (ASX: WES) including companies like Officeworks and Bunnings. I think most of the revenue uplift for these companies has already been priced in to their shares. They may well post strong results this earnings season, but I don't think it is sustainable.
