The ASX earnings season is kicking off, and it could pan out to be one of the most interesting and volatile reporting periods in some time.
We're coming off the back of the COVID-19 era of strong earnings for retailers, tech companies and many other sectors.
Share price valuations have gone through their fair share of volatility since the start of 2022. But now it's time to see how inflation and interest rates are hitting the actual company financials.
I'm on the lookout for the following five things over the August reporting season.
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Major share price reaction
Investors were negative last year as many ASX shares went through some hefty bumps. But we've also seen the market recover. In the past 12 months, the S&P/ASX 200 Index (ASX: XJO) has lifted around 10%, as we can see on the chart below.
It can be tricky to predict which way the market will go when a company result is released. A share price can go up or down significantly when the result is better or worse than investors are expecting.
And a company can deliver 20% profit growth but see a share price fall if the market was expecting 30% profit growth.
The Motley Fool's Andrew Legget explained this phenomenon:
You'll often hear about how a company 'missed' expectations or analyst forecasts. When this happens, you'll usually find the share price declines, sometimes materially so. When a company 'beats' expectations or forecasts, the share price will go up (but not usually as much as they go down when 'missed').
It's a curious concept and is one that places the onus on the company achieving what others, with less information, seem to think it should do.
It's something that only really appears to be a thing for investors. We don't blame the powerball results for missing our expectations of what numbers should come up.
Now the time will tell whether the market has been too optimistic or not.
Are retail sales continuing to worsen?
In the last few months, we've heard from a number of retailers like JB Hi-Fi Limited (ASX: JBH), Adairs Ltd (ASX: ADH), Baby Bunting Group Ltd (ASX: BBN) and Universal Store Holdings Ltd (ASX: UNI) advising that worsening sales and foot traffic were clouding the outlook.
I'm going to pay close attention to whether retailers are saying sales have now stabilised at this lower level or whether they're bracing for an ongoing deterioration. The trading update for the first few weeks of FY24 could be very instructive for investors.
Bank reporting
We're going to see a number of lenders' reports during the next few weeks in ASX reporting season, including Commonwealth Bank of Australia (ASX: CBA) and Bendigo and Adelaide Bank Ltd (ASX: BEN).
ASX bank shares make up an important part of the ASX 200, so what happens here could influence the ASX share market.
Banks have been telling investors about strong competition in the sector, which is hurting the net interest margin (NIM).
I'll be very curious to see whether CBA, and other smaller lenders, talk about the situation as though the worst of the margin hit is over, or if there's further margin compression to come.
The loan arrears situation could also give a big indication of whether the economy is going to go through a rough patch. This could indicate whether the large array of other household-facing businesses is going to suffer.
Inflation
Rising inflation has taken a toll over the 18 months. Some ASX shares have been able to pass price increases on, which is useful for protecting (or even growing) the profit margins. I'll be looking at whether some companies have been able to increase their margins or not in this result.
The Reserve Bank of Australia (RBA) is trying to reduce inflation, so I'll be curious about whether businesses talk of ongoing inflation pain or whether the commentary and outlook reflect an improving situation.
Bargain buying opportunities?
Earnings results give investors great insight into whether or not a company is good value. We can always see the share price, but we only get a few updates throughout the year.
We don't need to rush into any decisions if a company's share price goes up or down. The Motley Fool investment team recently said about the ASX reporting season:
…the rapid, often knee jerk, reactions to announcements during reporting season will typically smooth itself out in the following days. There is no rush to do anything.
In fact, the more time you take, not only will the volatility tend to level itself out, you'll also be able to come up with a better understanding of what is actually happening, which is always a good thing isn't it?
There are no awards for being the first to form a conclusion. Take all the time you need. Don't panic.
