Two brokers, three buybacks, four downgrades: Wrapping week three of earnings season

The Morning Wrap

Livewire Markets

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.

MARKETS WRAP

  • S&P 500 - 4,199 (+1.41%)
  • NASDAQ - 12,639 (+1.67%)
  • CBOE VIX - 21.78
  • FTSE 100 - 7,480 (+0.11%)
  • STOXX 600 - 433.44 (+0.32%)
  • SPI FUTURES - 6,979 (+0.05%)
  • US 10YR - 3.034%
  • USD INDEX - 108.42
  • GOLD - US$1771/oz
  • WTI CRUDE - US$92.69/bbl

EARNINGS WRAP AND PREVIEW

In the travel space, you could say Qantas (ASX: QAN) went for shock and awe while Flight Centre (ASX: FLT) was a little more honest. Qantas announced a $400 million share buyback which completely caught the market off guard but at least one Livewire contributor reckons that this is just the start of something better in the long run. Flight Centre, in contrast, went for the blunt approach - CEO Graham Turner said "it is impossible to provide profit guidance for FY23". One Livewire contributor argues that buying or selling this stock will essentially come down to your thesis.

In the tech space, Appen (ASX: APX) swung to a half-year loss and admitted things are getting worse. The stock is down 90% since August 2020. Zip posted an even bigger full-year loss, made worse by foreign exchange differences. It says it will now close its UK operation to focus on where it can win - Australia and the US. Speaking of things shareholders don't want to hear, City Chic (ASX: CCX) chose not to pay a dividend despite a near-40% rise in revenues. It did, however, say that inventories are likely to normalise in the near future. I wish we could say the same for Target and Macy's...

In total contrast, IDP Education (ASX: IEL) profits and revenues rebounded with management saying growth prospects are looking strong. Nine Entertainment (ASX: NEC) reported a 70%+ boost to its net profit and said it would start its own share buyback program. And finally, as if two buybacks were not enough in one day, Whitehaven Coal (ASX: WHC) tripled its full year revenues, will pay out a bigger dividend, AND start its own share buyback program. 

Finally, in two bits of non-reporting season news, Perpetual Asset Management will buy out Pendal Group while Kerr Neilson will step down after nearly 30 years at his baby, Platinum Asset Management.

Today's calendar is shorter in number but no less important. Dusk (ASX: DSK), NextDC (ASX: NXT), Ramsay Health Care (ASX: RHC), and Wesfarmers (ASX: WES) are all on deck. Such fun!

STOCKS TO WATCH

Four downgrades is the headline of today's Charts and Caffeine, but the reality is that the four downgrades affect four very different industries. Let's go through them one by one:

  • Credit Suisse found the first half report of Iluka Resources (ASX: ILU) to be mixed but it's the interim dividend that really disappointed. Most importantly, the brokers believe price weakness is inevitable for its flagship commodity. Rating now neutral, down from outperform.
  • CS analysts are also not big fans of Spark New Zealand (ASX: SPK), arguing upside will be limited even if the outlook is rosy. It's now also a neutral, down from outperform.
  • Ord Minnett praised Sonic Healthcare (ASX: SHL) for its post-pandemic recovery but noted the company will face a tougher cost environment and a health system with funding and staffing challenges, the broker asserts. With volumes down and acquisition opportunities slowing, it's no wonder that there was no outlook given. The company is now a hold, down from accumulate. 
  • Finally, Ords downgrades WiseTech (ASX: WTC) to an accumulate from buy on valuation concerns - but doesn't dispute its strong result. 

JACKSON HOLE PREVIEW

I hear you. Wasn't earnings the most important thing this week? Well, yes but only for the Australian market. Everyone else is focused on the words of one man's words at 12am SYD time/10am New York time tonight: Jerome Powell.

Punters across the major US business networks all agree that Powell will, in all likelihood, amend the market's prior thinking that rate hikes are coming to an end. Having said this, the following things are possible (and big shout out to DailyFX for compiling this so neatly and beautifully):

  1. The US economy is not in a recession 
  2. If the US economy is in a recession, it won’t stop the Fed from raising rates further to fight inflation
  3. The outcome of the September FOMC meeting – either a 50-bps or 75-bps rate hike – will be contingent upon how US data evolves over the coming weeks. 

As for the analysts, here's a couple of punchy lines from people I follow closely. First, the words of Vishnu Varathan at Mizuho Bank:

Jackson Hole may reveal that the world has not dug itself out of the stagflation risk hole ... but markets may opportunistically flex either way depending on whether focus is on inflation pounding or recession risk pivot.

This part from Ed Yardeni at Yardeni Research speaks to what the market may have in the back of its mind but not be prepared to outright ask. 

The question is will he say that the federal funds rate is currently at neutral as he did a month ago? He'll probably avoid that controversial issue. He might indicate that any expectations that the Fed will ease next year are not consistent with the latest Summary of Economic Projections (SEP) released on June 15.

And finally, Matt Luzzetti at Deutsche Bank US noted that risk management in communication will be as vital as the hard truth about a potential wage-price spiral in the US. He believes Powell will be hawkish, if only to offset what his colleagues have been telling everyone else of late.

.... it will be important to see whether Powell adopts this risk management approach espoused by some of his hawkish-leaning colleagues to reinforce the Fed’s unconditional commitment to achieving its 2% inflation objective.

All in all, it's not an event worth staying up until midnight for - but it is worth keeping a close eye on in case you wake up Saturday morning and realise markets have gone one way or the other.

THE CHART

One of the biggest themes of reporting season here over the last three weeks has been cost inflation - the cost of inputs, the cost of supply chain problems, and most pertinently, the cost of hiring and keeping great talent.

Enter this brilliant chart from Goldman Sachs. They went through a bulk of the S&P 500 earnings reports and fond out how much labour cost are impacting on revenues. The result is quite telling.

I wonder if they'll do this for the ASX 200 - and even if they don't, you can see labour costs being mentioned in almost every report being released this month. Mining companies say they can't import cheap(er) labour from overseas. Travel companies say it's difficult to hire great staff after they had to fire them all during COVID-19. And don't even get me started on the consumer companies (discretionary and staples). 

CHART OF THE WEek

Everything old is new again... ish.

Today's report was written by Hans Lee.

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The Morning Wrap
Markets Wrap
Livewire Markets

Australia's most comprehensive markets wrap is back for 2023, with a fresh look and a new emphasis on getting you and your money ahead of the curve. Available each weekday morning at 8:30am AEDT. Written by Chris Conway, Kerry Sun, and Hans Lee.

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