Investor Spotlight: Stock gems on sale post reporting season

The rollercoaster of reporting season

Reporting season is often challenging for investors, and on balance, it is a resetting of earnings forecasts for the next 12-month period, comparing the historical earnings reports against the expectations/guidance or the lack thereof for the year ahead, versus valuations.

This season has been notable for extreme volatility in share prices post-earnings reports. The reasons are varied, but relevant to appreciating the dynamics going on.

The usual key drivers of a share price post-results are:

• Expectations, and whether they are better or worse
• Outlook or guidance statements
• Profit margins
• The state of the balance sheet
• Macro headwinds or tailwinds
  

• Wisetech Global (WTC): short-term glitch for a longer-term diamond

WiseTech Global is a leading developer and provider of software for the global logistics industry and has been one of Australia's top technology companies.

Market frenzy and share price volatility

In the lead-up to reporting season, the share price became a victim of the "AI" narrative and was bid up in what can only be described as the momentum frenzy trade of 'buy anything which is possibly benefiting from AI'.

Earnings report and share price reaction

The company reported on August 23, and the share price fell 20% on the day, although some investors failed to appreciate the stock had rallied from $48 at the beginning of the year to $88 in late July, on nothing but speculation.

WiseTech Global weekly chart

Challenges and outlook

The results were broadly in line, but the market was concerned by the increase in R&D in the 2H23 and the upgrade in R&D in FY24 guidance. Equally, management downgraded EBITDA guidance for FY24 – FY26 by -12% to -10% and revenues by -4 to -6%, reflecting a decline in margins.

The fall represents the integration of recently acquired lower margin businesses and the upgrade in R&D, as well as a $40m cost-out programme.

Refinitiv analyst assessment chart

Analyst assessments and CEO's perspective

Analysts have downgraded forecasts accordingly. FNArena has a more upbeat average price target of $77, boosted by the bullish Ord Minnett target of $95. This compares to Refinitiv’s mean target of $73.50.

What we do know from Founder and CEO, Richard White is that the short-term share price movements do not detract from the goal of building a truly global software logistics firm. White was quoted as saying “I’ve got a very positive view on the outlook for the company. What’s going on today is short-term stuff.”

FNArena's forecast chart

• Amcor PLC (AMC): a global leader in packaging set to benefit from disinflation

Amcor is a leader in global packaging and another company to experience pandemic-related headwinds which are starting to unwind.

Inventory destocking subsides

According to Wilsons who have upgraded the stock to a core portfolio holding, the headwinds from inventory destocking for major companies like Walmart, Costco and their clients, such as Proctor and Gamble, Pepsi and Coca-Cola have pretty much finished.

The move by retailers to just-in-time to just-in-case inventories led to overstocking during the pandemic, which is finally unwinding.

Growth and disinflation potential

Amcor was unable to pass on any COVID-related cost increases as volumes had been under pressure. Now there is the dual tailwind of the potential for volumes to start growing again and disinflation as cost declines, taking pressure off the margins.

Amcor PLC weekly chart

Earnings growth prospects

Wilsons envisages Amcor can grow earnings at 7% per annum through FY24-FY27 and is currently trading at the lower end of the historical valuation at 13.7x 12-month forecasts with an expected 5% yield.

5- and 10-year averages chart

Share price upside will be afforded through share buybacks, valuation increases and the attractive yield.

Listing and price target considerations

The stock’s primary listing is now in the US. Bear this in mind when observing the Refinitiv price target, quoted in US dollars, versus FNArena which is based on the Australian dollar price target.

The FNArena target price is $15.48, although Ord Minnett has a target price of $16.59 and an Accumulate rating. Wilson expects the stock to outperform and no target price is offered.

FNArena's forecast chart

• Resmed (RMD): Challenging short-seller narratives

Analysts and investors were left scratching their heads after ResMed’s stock price fell sharply post the 4Q23 results. ResMed is the world’s largest and leading provider of sleep apnoea machines and services.

ResMed weekly chart

Sales growth vs. bottom line impact

The growth in sales revenues failed to translate down to the bottom line as input and freight costs continued to weigh on margins, which disappointed the market.

Impact of short sellers and obesity narrative

However, the overarching impact on the share price has been short sellers (the stock is also listed in the US), on the narrative that ResMed’s product and service offering will be badly impacted by the success of the weight loss drugs from Eli Lilly and Novo Nordisk, Ozempic and Mounjaro.

Demographic tailwinds vs. ex-growth conclusion

The bottom line as explained by many experts is that sleep apnoea is not necessarily caused by obesity, so to conclude that ResMed is going ex-growth when there are secular demographic tailwinds of ageing populations (who develop sleep apnoea) is fallacious.

Refinitiv analyst assessment chart

FNArena has an average price target of $36.57, compared to the current price on the ASX of around $25.

FNArena's forecast chart