Reporting season wrap: Short term panic sends share prices haywire

Some of the biggest names in business came out to plea to their investors to look beyond their short-term views. Big Australian companies’ share prices have been hammered.
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Richard Goyder, Wesfarmers managing director has lashed investors for short-term thinking. Photo: Philip Gostelow

Ansell chief executive Magnus Nicolin said investors failed to understand foreign exchange rates. Photo: Dominic Lorrimer

Seek’s Andrew Bassat pleaded with investors to look beyond the short term. Photo: Josh Robenstone

Illustration: Simon Bosch.

A miserable week in global markets has darkened an already gloomy year on the ASX. It’s certainly enough to have retail investors in tears but even Rupert Murdoch seems worried.

After the US sharemarket fell 2 per cent, joining in the fearful sentiment on China that’s gripping the market, the media mogul pondered on social media whether a global fall in asset prices was a “timely correction or sign of major global crisis the near future?”

It is a question many are asking. It is a global sell off, driven by easily-panicked investors, but it has come at a particularly unfortunate time for Australian companies as their profit reports roll into the market.

The fortunes of companies this reporting season have rested on the fine print: the two or three lines of the outlook for next year. Those few words have sent some share prices plunging.

Things came to a head this week when some of the biggest names in business came out to plea to their investors to look beyond their short-term views.

Even seasoned long-term investors have felt the jitters from an increasingly panicked marketplace.

SEEK founder Andrew Bassat urged investors to look beyond “short term profit” and trust the company on its vision. The comments came after the company’s share price slid 10 per cent despite SEEK posting a 20 per cent boost in its revenue.

“We’re trying to be explicit about who we are. Fair to say that some shareholders are going to hate that because they care more about next week’s profit than anything else” Mr Bassat​ told Fairfax Media.

Arnold Bloch Leibler partner Jonathan Wenig​ said the market has become a “fickle partner” and chief executives are on notice.

“Manage well, execute on your strategy, and achieve and you can still find the market reaction is underwhelming,” he said.

The key word was expectation, Mr Wenig​ said.

“What matters is not how well, or how poorly you’ve done, but how that compares to what was expected,” he said. All prices dropping not just shares. Timely correction or sign of major global crisis in near future?— Rupert Murdoch (@rupertmurdoch) August 20, 2015If new recession biggest nations have few tools left to fight it. mountains of cash everywhere, but nobody investing.— Rupert Murdoch (@rupertmurdoch) August 20, 2015

There have been plenty of examples that highlight that theme this year as investors played whack-a-mole with companies which on paper appear to be operating perfectly well in the difficult economic conditions.

Ansell was one of the early victims of the short-term shareholder reaction. Shareholders of the rubber glove and condom maker sent the company’s stock price down 15 per cent despite delivering a 20 per cent surge in underlying net profit to a record $US245 million ($333 million). Sound familiar?

In the company’s outlook it said currency exchange rates, assumed to remain the same as in the fourth quarter of 2015, would hit the company revenue by $55 million.

Chief executive Magnus Nicolin​ placed the blame squarely on the shareholder for the share price plunge: he said investors and analysts “hadn’t fully understood or seen the effects of foreign exchange”.

Even the market darlings were savaged. Domino’s Pizza Enterprises reported a staggering 40 per cent jump in net profit. Cue the party. It also promised 20 per cent growth in the 2016 financial year, which looked good, but below analysts’ expectation of 25 per cent.

There was also cynicism about the company making good on its “15-20 minute delivery or free” promise.

Whack. Down 7 per cent went Domino’s.

Even the big caps were slugged. Blood products maker CSL’s share price broke through the $100 mark for the second time in its history. Its net profit after tax rose 7.8 per cent to a whopping $US1.38 billion ($1.9 billion) .

But then its stock fell 6 per cent.

How about fellow biotech Cochlear? The hearing implants maker profit surged 56 per cent to $145.8 million, but its outlook, while positive, did not satisfy expectations. It was summarily punished with a 15 per cent share dive.

Financial services giant AMP missed analysts expectations, but delivered a 12 per cent lift in its underlying profit to $570 million. Whack.

“There are investors who are looking for different cash flow signatures,” a sanguine AMP chief executive Craig Meller said afterwards.

“Our mindset as a company is how do we make sure that we deliver for the short term, and we deliver for the long term.”

Stellar results were no panacea. Qantas on Thursday announced a stunning $975 million profit, a stark turnaround from its previous year’s multi-billion dollar loss. But its shares sank 6 per cent on a lack of guidance for next year.

Credit Suisse Private Banking chief investment strategist David McDonald said while tough conditions were well-signposted, weaker outlooks across all industries was the concern.

“That has definitely been the surprise so far in reporting season, outlooks have disappointed, particularly the spread of sectors where we’ve seen downgrades,” he said.

“It seems to have been across industrials and healthcare, quite a few sectors where the outlooks have been less than rosy.”

Mr Wenig​ said while conventional wisdom suggested companies should worry more about their strategies and long-term performance, their share price movements were an immediate indicator of their performance.

“Human nature is such that where incentives are linked to share price, attention will inevitably be drawn away from the strategic horizon, and towards the Bloomberg ticker along the bottom of the computer screen,” he noted.

Alphinity Investment Management principal Johan Carlberg said some of that short-termism may be reflective of the changing composition of the sharemarket.

He said the market was experiencing a higher mix of short-term investors and hedge funds compared with the more traditional, longer-focused institutional investor set.

He added of the companies that did get a whack, their share prices usually settled in a few days.

Peak Asset Management executive director Niv Dagan said the word “challenging” was a constant in company forecasts this year.

“Companies are very nervous about the next 12 months, the majority of chief executives are saying the outlook is going to remain difficult,” he said.

“The most alarming thing is some of the companies are not even providing an outlook statement,” Mr Dagan​ said.

“When investors don’t get an outlook statement there’s uncertainty, and when there’s uncertainty, there’s further downside.”

Downer EDI was one company which said its operating environment would remain “difficult” while posting a lower 2016 guidance of $190 million net profit before tax. Cue an 11 per cent share price slump.

That mining services companies are under pressure comes as no surprise to Mr Dagan​, but share registration and administration company Computershare’s result was more alarming.

The company’s share price fell 9 per cent to a two-year low after the company not only missed profit guidance this year, but earnings for the next financial year were forecast to fall 7.5 per cent.

Mr Carlberg​ agreed the statements had on average been disappointing, chalking it up to a combination of macro and company specific concerns.

“Tailwinds from economic growth are fairly subdued at the moment, it doesn’t really matter which region you’re in, be it domestic or overseas,” he said.

He also noted any benefits from a weaker Australian dollar, be it companies earning in US dollars and export-driven companies had largely been priced into company share prices.

But he said a weaker euro was also hurting companies, a factor many investors had ignored.

“With the euro weakening so much against the US dollar the translation of those earnings back into US dollars has been quite interesting,” he said.

CSL was one example where this was hurting their bottom lines, also Ansell, which said its revenue was partially brought down by weakness in the euro and the Canadian dollar.

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