February 2024 reporting season recap with Firetrail Investments

With the barrage of news and data that Australia's February reporting season brings, it can be difficult to determine key takeaways for investors.

Blake Henricks and Eleanor Swanson joined me to provide a recap of the key themes of this reporting period and their favourite results.

Key trends

Blake Henricks, Firetrail High Conviction Portfolio Manager, highlighted the large-cap market's growing caution of potential government intervention due to cost-of-living pressure, which is driving company investment into customer experience. He also noted an uptick in M&A activity, with foreign companies showing interest in Aussie companies like Altium (ASX: ALU) and CSR (ASX: CSR).

Eleanor Swanson, Firetrail Small Companies Portfolio Manager, provided her insight on small caps. Swanson noted that high quality companies have been taking market share despite the overall market declining.  A2 Milk (ASX: A2M) managed to take share and grow revenue despite the China infant formula market being down 14%. Small companies have also been pulling their price lever in response to cost inflation, resulting in peak gross margins for companies like Nick Scali (ASX: NCK) and Beacon Lighting (ASX: BLX) .

Our favourite stock picks

Swanson singled out Bravura Solutions (ASX: BVS) as her top small-cap pick. This FinTech standout turned its balance sheet around dramatically from a weak position last year to a robust $80 million cash reserve, thanks to significant cost reductions. Bravura is now back on a clear trajectory to increase earnings margins by 20%, marking a noteworthy comeback.

Henricks' standout for the season was ResMed (ASX: RMD). Despite concerns over emerging weight loss drugs affecting demand for ResMed sleep apnoea devices, the company reported significant growth, benefiting from its main competitor facing a sales halt on sleep apnoea devices by the FDA.

Patterns to look out for in 2024

Swanson noticed a lot of stockbroker research notes titled “the tale of two halves” – claiming that companies had a tough first half of the financial year but are set to improve their outlook in the next half. We’ll have to wait and see come August reporting season.

Meanwhile, Blake Henricks anticipates a shift in the destocking cycle, predicting that inventory levels will stabilise by September, setting the stage for a more balanced market.