Buy Hold Sell: 3 cracking results and 2 disappointments

In this episode, Firetrail's Blake Henricks and Market Matters' James Gerrish analyse the highs and lows of the February reporting season.
Buy Hold Sell

Livewire Markets

We are done and dusted with another reporting season, and what a month it was. Stocks were heavily sold off on earnings misses, soared on earnings beats, and ended up pretty much where they started once the dust settled. 

Throughout this earnings season, two themes stood out. Wages growth reigned supreme as a widespread headwind for many companies - not only those based in Western Australia but across the board, while previously inflated cost pressures finally started to abate.

According to FNArena, 32.8% of stocks missed earnings expectations, 38% were in line and 29.3% beat estimates over the past month. 

So in this episode, Centennial Asset Management's Matthew Kidman was joined by Firetrail Investment's Blake Henricks and Market Matters' James Gerrish for their analysis of three stocks whose results shot the lights out during the February reporting season. 

Plus, they also each name one company that disappointed investors with a less-than-desirable result. 

Note: This episode was filmed on Wednesday 8 March 2023. You can watch the video, listen to a podcast, or read an edited transcript below.

Edited Transcript

Matthew Kidman: Hello, my name is Matthew Kidman and welcome to Buy Hold Sell, brought to you by Livewire Markets. And we've just been through reporting season. It's been pretty tough, but guess what? We've gone through it and there are some stocks that have done very, very well and may be worth watching. So to talk about it today I've got Blake Henricks from Firetrail Investments and James Gerrish from Market Matters. 

James, we'll start with you. Let's go down the tech side. It used to be a sector we all loved, but not anymore. WiseTech Global, it's still on fire, and still keeps growing. Buy, hold, or sell?

WiseTech Global (ASX: WTC)

James Gerrish (HOLD): It's a hold from me. It's done all the great things. So it's obviously grown the number of customers that it serves and the customers that it has continue to spend more, so they're doing something right. I've been nowhere on the stock, Matthew. So I don't own it. I think it's too expensive to go out there and buy now, but it's a hold. They're kicking goals.

Matthew Kidman: Blake, I know you're a value guy. Buying something at 80, 90, 100 times PE, especially in this market, must be hard. But WiseTech's done an incredible job. Buy, hold, or sell?

Blake Henricks (SELL): They have done an incredible job. It's a sell for me. Firstly, you've got to respect the operating performance of that business. They have grown the business very well. They actually just won a contract with the world's largest freight forwarder, Kuehne+Nagel. Got to respect that. It's not a buy because it's on 19 times sales. I think it's a sell because they've done 40 acquisitions and it's just impossible from my perspective to get comfortable with what's going on in the business.

QBE Insurance (ASX: QBE)

Matthew Kidman: Now let's go to something that the market loves to hate, but it's actually been a bit of a star lately, QBE Insurance. Buy, hold or sell?

Blake Henricks (BUY): QBE is a buy. What was great about the result wasn't that it upgraded by 3-4%, that's what the market did. It was that it didn't have a shocker.

Matthew Kidman: Always has problems, doesn't it?

Blake Henricks (BUY): Always has problems. But you know what? If you actually look at the underlying trends of the business, in the last three years, they've been steadily improving over time. One of the great things is the new CEO, Andrew Horton, has increased the amount of catastrophe allowance. That's going to mean more reliable profits. It's on a single-digit PE one year forward. It's a buy.

Matthew Kidman: James, you could have paid me anything to say QBE was going to be in our great results segment of this show. Buy, hold, or sell?

James Gerrish (HOLD): It's a hold for me. I hate sitting on the fence, Matthew, and I am on this one. But I think to Blake's comments around the operational performance, it's really improved over the last few years. They've simplified their business. They're not writing premiums for premium's sake. They're focusing on areas where they've got an edge. But I think the macro tailwinds have been really supportive of it. It's a big leverage beast to the macro environment, driving premium increases and increasing the returns they're getting on the float. So if I look six to 12 months out, I think that driver, that tailwind, is not as significant as it has been in the last 12 months.

Matthew Kidman: So you're getting off the beast, not riding it?

James Gerrish (HOLD): I think so. And it concerns me that whenever QBE is - and this might be the wrong way to think about it - whenever it's been doing well, it does something to stuff it up.

Matthew Kidman: Yeah, we've got burnt fingers.

James Gerrish (HOLD): We've all been burnt.

Seven Group (ASX: SVW)

Matthew Kidman: Okay, let's get to Caterpillar, Coates Hire, Seven Group. Good result. Buy, hold, or sell?

James Gerrish (BUY): Yeah, a great result from Seven Group. It's a buy for me. Coates is going particularly well. WesTrac is going particularly well. It's not on a hugely-demanding premium in terms of valuation relative to the market, but also the sector that it operates in. The trends are good. We own Deere & Co over in the US, and they're seeing really similar strength in their business, so I think it bodes well for Seven. So it's a buy for us.

Matthew Kidman: What about you, Blake? Do you like this story? It's been going well for a while. It's obviously tapped into a lot of spending in the mining sector after a bit of a hiatus. Buy, hold or sell?

Blake Henricks (HOLD): It's a hold for me. You've got Beach Energy doing poorly, Boral with a bit of an opportunity to turn around. But what matters is WesTrac. The great news for Seven Group shareholders is they upgraded WesTrac earnings growth from low-teens to mid-teens. That has implications for this second half, which is going to be very, very strong on the back of that. But then I have a look at Coates and they're almost at peak cycle utilisation. You never know when to get off the train. It's a hold. It's doing well for now, but I think if we look out a couple of years, it might be doing a bit tougher.

Commonwealth Bank (ASX: CBA)

Matthew Kidman: Okay. Let's get back to our natural habitat, given we're in a bearish market. What's a company that disappointed you in the reporting season that is worthwhile pointing out?

Blake Henricks (SELL): I think Commonwealth Bank. It's a very big one. It's seen as safe. It was hitting all-time highs earlier this year. So it's been amazing, given everything that's going on in the world, that Australia's largest bank has been hitting all-time highs. But what we saw was they're talking about NIMS peaking in October. They're talking about mortgages being written below ROE and it's going to be very hard to reprice mortgages in this environment. Could you imagine a bank going out of cycle on a mortgage? I think it's very, very unlikely. So we think it struggles along. And on 17 times PE, over two times book, it's vulnerable to any more bad news.

Centuria Capital (ASX: CNI)

Matthew Kidman: Yeah. Can you beat that suggestion as far as bad goes, James?

James Gerrish (HOLD): I'm going to go down the market cap spectrum a little bit, Matthew and focus on Centuria Capital. The result itself was a reasonably slight beat to what we were expecting in terms of their earnings, but the composition was weak. So the beat was driven by some of the areas of the business that are not the high-quality earnings drivers that are going to be that way going forward. So funds management was slightly weak. The cost of capital, and interest expenses are going up. And one of the X factors in this business is around transactions in the next six months. It could go well, it could not. So to me, I looked at the result, and it was good on the surface and a little bit soft underneath. So CNI was one that disappointed me. 

Matthew Kidman: If you take the time out to listen to these wise guys, you can be sure that you could get some winners out of a very, very tough reporting season. If you enjoyed that show, give it a thumbs up. And of course, don't forget to subscribe to our YouTube channel for Livewire Markets. There's lots of great content.

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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.

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