Firmus hype, CBA headwinds and Sonic's earnings problem: 3 fundies sound the alarm

Everybody loves a great compounder. A business that steadily grows earnings, reinvests capital at attractive rates and rewards shareholders with rising dividends and share prices over time.

But what happens when growth slows, the economics deteriorate, or investors get carried away with a compelling story?

In a recent article inspired by Bank of America's 'Global Steady Compounders' list, I asked four Australian fund managers to nominate their favourite ASX businesses capable of delivering consistent long-term growth.

But I also put the opposing question to them:

Which companies could lose their compounder status, never deserved it in the first place, or are unlikely to ever become one?

Their responses made for interesting reading, with Firmus, Commonwealth Bank and Sonic Healthcare all coming under scrutiny. Here's why.

1. Firmus: An AI growth story with enormous execution risk (Jun Bei Liu)

One company she's particularly cautious about is the much-hyped Firmus, whose proposed US$5.5 billion IPO - potentially Australia's second-largest ever – is facing growing uncertainty amid concerns over its lofty valuation, substantial debt and investor demand.

"Firmus is probably one of the most polarising IPOs I have ever seen. The lack of detail they disclose is unprecedented. I think Firmus is a very high-risk proposition – very high profile, but with enormous risk involved," Liu said.

Her biggest concern is execution risk.

"97% of the data centre capacity they've promised hasn't even been built," she says.

"They might deliver cheaper earnings in two years if they build what they promise, but that's speculative."

Liu isn't bearish on data centres themselves. In fact, she prefers established operators such as NextDC (ASX: NXT) and Goodman Group (ASX: GMG), which have proven track records.

But her preferred way to play the boom is through the businesses actually building the infrastructure.

"We much prefer to be in the companies that actually build those data centres – the engineers, the electrical contractors like Southern Cross Electrical (ASX: SXE) and GenusPlus (ASX: GNP)."

2. Commonwealth Bank: The golden age has come to an end (Chris Scarpato)

Falling interest rates, rising household incomes, expanding credit and a seemingly unstoppable housing market created extraordinarily favourable conditions for lenders.

But Scarpato believes investors should be careful about extrapolating that success into the future.

"It's hard to go past the Big Four banks, and Commonwealth Bank of Australia (ASX: CBA) in particular."

He argues that the tailwinds underpinning decades of earnings and free cash flow growth are now reversing.

Elevated inflation, higher interest rates, cost-of-living pressures, proposed tax changes and falling property prices are creating a very different environment for lenders.

With residential mortgages accounting for a substantial proportion of major bank profitability, weaker property transactions and lending volumes could have significant consequences.

"Given residential property lending has become such a considerable driver of Big Four profitability, we believe there are material headwinds ahead which will put pressure on earnings and free cash flow growth over the coming years."

Scarpato isn't necessarily arguing that CBA has become a poor business. Rather, the conditions that made it such a successful compounder may no longer be as favourable.

3. Sonic Healthcare: Revenue doubles, but earnings go nowhere (Romano Sala Tenna)

The pathology, laboratory and diagnostic imaging provider has consistently grown its revenue and dividends over the past decade. On the surface, it looks like a terrific wealth-generation machine.

But Sala Tenna argues that Sonic is a classic example of buying revenue and profit growth at the expense of earnings per share (EPS).

"For the financial year ended 30 June 2016, SHL reported revenues of $5,052m. 10 years later the revenue had doubled to $10.87bn (30 June 2026)," Sala Tenna says.

"Yet at the same time EPS has basically flatlined. In the 2016 FY, EPS was $1.09 per share. 10 years later it has barely moved, at just $1.23 per share. In FY25, EPS was $1.09.7cps – almost identical to the level 9 years earlier!"

And what about those growing dividends?

"And the dividend growth? Well that’s been almost entirely attributable to an ever-increasing payout ratio, to the point where it peaked at 100.3% of EPS in FY25."

For investors, it might be time for a health check of Sonic's financials. After all, genuine compounding requires sustained growth in earnings attributable to each share, not simply a bigger business.