There’s no doubt this year has been a shocker thanks to the pandemic. And the latest reporting season has got in on the act by providing us with another jolt to the senses. The latest one delivered a few eyes-wide-open, jaw-dropping results, although that’s not to say it was all shockingly bad.
In this episode of Buy Hold Sell, Henry Jennings from Marcus Today and James Gerrish of Market Matters cast their eyes over the recent reporting season and share their views on some of the standout results.
They reveal the companies they graded as a massive fail and why, as well as those that surprised on the upside. We also asked them to pick a result that they thought was outstanding but the market overlooked.
Notes: Watch, read or listen to the discussion below. This episode was filmed on 26 August 2020.
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Vishal Teckchandani: Welcome to Buy Hold Sell, brought to you by Livewire Markets. My name is Vishal Teckchandani. Today. We're putting our shock jock caps on because we're going to talk about the six most shocking results from earning season, which companies imploded, which shut the lights out, and which are the sleeping giants that you may have missed.
Joining me on the show today is Henry Jennings from Marcus Today, and James Gerrish from Market Matters. James, let's start with you. You've got your shiny red texter out. Which company gets the big F minus this earning season?
James Gerrish: There was a few to pick from, Vishal, but I'll go with Blackmores. I think that result was a pretty poor result. They've got earnings pressure. They've got margin pressure. It's not a new surprise in terms of that business doing it tough. But I guess what surprised me about that company, as well, is that the market is still reasonably upbeat about it.
You know, there's still eight holds in the market, in terms of the broker community. So for me, poor result, stock should go down from here.
Vishal Teckchandani: Okay. Sounds like it needs a vitamin uplift. And what are you doing with the company in your portfolio? Is it a buy, hold, sell?
James Gerrish: Thankfully, don't have it. I'd be selling it, if I had it, Vish.
Vishal Teckchandani: Fantastic. All right, Henry, turning to you. So which company failed their grades in spades? What was the big shocker of the earning season?
Henry Jennings: I guess it's been an interesting earning season. One that disappointed me the most was Telstra. I had high hopes for Telstra. We're all stuck at home. We're all consuming data like there's no tomorrow. They even put up mobile plans just before the... during COVID. They're now five bucks extra. So I was kind of underwhelmed by Telstra. It was really disappointing.
I call it tech in a cardi, because it pretends really hard to be a tech stock. Andy Penn tries really hard to be a kind of an Australian Zuckerberg, and he looks kind of casual, but it just is daggy. In fact, it's not even fuddy-duddy. It's duddy-duddy, at the moment. It was just disappointing. I think that the disappointing side... 5G.
What happened to 5G? We were all looking across the valley to the promised land. We knew there was going to be a hole in earnings because of NBN and that side of things. But 5G was the big hope. And yet, there was not that much of a mention of it, really. I know we're going to get 75% of the country, in theory, by June, 2021, is going to be covered by 5G. But really, guys, you could do better. That was an F, an F minus.
Vishal Teckchandani: An F minus. Fuddy-duddy. Telstra disappointing. It really rings a bell. So what would you say to an income investor, today, who's holding it, thinking that dividends are just going to flow through like rivers of gold?
Henry Jennings: Well, dividends are pretty scarce these days in most companies. I guess the good thing for me is that the dividend was held, maintained 99% payout ratio. So that was pretty ritzy, but don't forget, during the GFC, they were paying out over 100%. So they have got the ability to keep paying dividends. So that's the only reason that I would be there. I think it's under pressure, but I think they should continue to pay dividends. And hopefully that 5G promise land will come into focus, and maybe COVID has interrupted all our plans on that.
Vishal Teckchandani: Are you still backing it?
Henry Jennings: I think, if you were parking cash, it's really defensive. It's really boring. It's fuddy-duddy tech in cardi. But it's... If you want to go defensive, maybe Telstra is a place to be, especially below three bucks. They've just gone ex-dividend though. So, the kind of the reasons to hold it 8 cents less than they were, couple of days ago.
Vishal Teckchandani: Makes sense. All right. Let's flip it around to the A-Team. Which report surprised you the most on the upside, Henry?
Henry Jennings: I think one that surprised me was Monadelphous, mainly because it had been written off by everybody. It's a mining services company, very much tied to Rio and BHP in the iron ore story, but it just seemed to get written off by the whole market. Admittedly, they have got a legal problem with Rio over... there was a fire that Rio have alleged... I think it's $493 million in damages. So it's a big hit. There wasn't actually much mention of that in the results. I must admit, not a lot of analysts focused on that.
But for me, the stock was probably pretty shorted into the result. Had a big pop. I'm not sure, after the pop, I'd be charging in, but certainly the business has stabilised. It's better than a lot of people thought, and it is geared to that iron ore story. And I think, as we come out of COVID and we do see global growth pickup, although we won't see iron ore maybe punching the lights out, we may see a stabilisation at these kind of nice, high levels. So that's good for Monadelphous.
Vishal Teckchandani: Okay. So it sounds like you're comfortably holding it?
Henry Jennings: Yes.
Vishal Teckchandani: Okay.
James Gerrish: Yeah, we hold that stock. And I've got to agree with Henry. You look at Fortescue's announcement yesterday, and they're talking about the amount they're going to spend on new mine development, the amount of money they're putting in the ground. So, it's a stock we've got in the portfolio.
Vishal Teckchandani: Fantastic. And as far as winners, the biggest upside surprise for you, James... What was that?
James Gerrish: Yeah, I guess not so much upside surprise to us, but probably to the market. I think Bingo industries, BIN, was a really strong result in the context of what the market was anticipating in that one. So, yeah, the market was very negative on the construction. So I thought that they were going to see weakness in their construction book, and that's going to feed into weakness in earnings, and then they've got some balance sheet issues. So that could force them down into an equity raise that would be really dilutive of share prices.
They didn't do that. They even expanded margins during a pretty tough time. So, relative to where the market was at, I think Bingo's result was a really strong one. And I think that stock probably continues higher from here.
Vishal Teckchandani: Sounds like investors hit the jackpot. You'd buy wholesale on it?
James Gerrish: Yeah. I'd be a buy here. I think the thesis around the short positioning on Bingo is now gone. People will cite that it's expensive on FY21 numbers. If you take a little bit of a view out in the future into '22 or '23, it becomes cheap. So I'm a buyer on it.
Vishal Teckchandani: Okay. We've gone through the winners. We've gone through the losers. Let's talk about the sleeping giants, because who doesn't love an underdog? What's a stock that's got a lot of potential, but the market just missed it in August.
IVE Group (ASX:IGL)
James Gerrish: Yeah. I'll give you a dog with fleas on it, with probably some warts, as well. IVE Group. IGL is the code for that. It's a printing business, a large-scale printing business. They've had a pretty atrocious last 12 months. They just lost a big contract from Carl's, which will wipe about 50 million off their revenue. But in terms of what the market... In terms of a result that I don't think the market has seen the nuggets of gold in, yet, IVE fits that bill, particularly in terms of free cashflow. The free cashflow number was really strong, and that's allowed them to pay down more debt than the market was anticipating. So the market was expecting debt to rise. It actually fell.
And I think that's the key to these results. So they're paying down debt when the market was concerned about their balance sheet. It's not without complexities and without risks, etc. But I think that's a really cheap structural business that's exposed to a cyclical upturn in the economy. So, IGL is that one.
Vishal Teckchandani: You're a contrarian buy on it, sounds like?
James Gerrish: Yeah, I would be.
Vishal Teckchandani: Okay. All right. Dogs, fleas, warts. Do you have something in that category, Henry?
Downer EDI (ASX:DOW)
Henry Jennings: Oh, when you say dogs, we talk about AMP but I'm not going to talk about AMP. But one that caught my eye, I guess, which has got leveraged to a recovery, is Downer EDI. It's got a lot of hands in a lot of pies. It's got a lot of hands in a lot of government contracts, especially in urban renewal and maintenance contracts with power and water side of things, which is good. They were trying to sell their mining services business. That's been put on hold because of COVID. They've also got a laundry business, which is doing quite well. So that's been good for them. And of course, they've got the hospitality and events business. Now, if we ever shake off this pandemic and get back to some sort of normality, Spotless could be reborn in some respects.
So I kind of like Downer. It's a sleeping giant. It's got a lot of things going forward. It's really doing nothing. And when people start talking about reopening the economy and those... the Flight Centres, the Webjets, all these sort of things that people jump into when you see the vaccine hopes, I think Downer's also got that potential, as well. Government stimulus at that state and federal level helping them. Solid government contracts. And also the fact that, if we do get events and hospitality back on track in some guise, then there is a kicker there for the Spotless thing.
And, of course, you've got mining services, which, although it's put on hold, given that we've seen the reemergence of mining as a relatively COVID-proof industry, I think it holds potential there. And it's just languishing. No, one's really taken much notice of it.
Vishal Teckchandani: And what are you doing within your portfolio? Buy, hold, sell?
Henry Jennings: It's definitely a buy.
Vishal Teckchandani: Okay. Well, there you have it, the six most shocking results from earning season. We were all so worried, but it wasn't much of a downer.
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Thanks Henry for mentioning Downer EDI. Speaking of mining, didn't they get Santos contract?
A few years ago I remember Bingo had some very adverse publicity as a result of the company's then practices which I think was before it publicly listed. If my memory serves me correctly the company featured in a Four Corners investigation which was fairly damming. It's interesting that this seems to be overlooked by analysts!
Thanks Henry, always enjoy your perspective.
Thanks for the feedback and the likes...always appreciated