Under the circumstances, the reporting season was reasonable, according to Morningstar head of equities Peter Warnes.

Warnes noted that analysts had been downgrading their estimates for fiscal 2023 after the first-half reports were released in February.

However, the disappointments came from companies’ fiscal 2024 guidance, “which sent the analytical brigade back to their spread sheets resulting in further downgrades”.

It’s a salient point raised by Warnes and was also highlighted in a recent interview by fellow analyst Mathew Hodge. Speaking to Ausbiz, Hodge noted that while there was a lot of talk heading into reporting season, there were not “too many skeletons in the closet”.  Hodge identified stocks that not only weathered the earnings season but also had a “reasonable outlook”.

These were Boral (BLD), James Hardie (JHX) and BlueScope Steel (BSL).

In his latest note, Hodge writes: “Building materials were not as bad as we previously thought. We had factored in some meaningful earnings declines. But in the near-term at least, the tail of work is dragging on and many have grown margins through price increases”.

Indeed, Boral and James Hardie were among the top of Morningstar’s upgrades with Warnes noting that building materials companies were a surprise packet in the reporting season.

Boral: Optimism on construction

Morningstar’s upgrade of Boral reflects several changes, including a more optimistic view on the construction cycle.

“We previously factored in a significant medium-term construction downturn, but that now looks unlikely, particularly given Boral’s exposure to the resilient non-residential and infrastructure markets,” Hodge says.

Nearly 70% of revenue is tied to infrastructure.

“Solid population and GDP growth, supported by immigration, should underpin longer-term demand for the infrastructure, non-residential, and housing markets,” Hodge says.

“Boral’s cost-control and pricing efforts means we are also more optimistic on the near-term outlook for margins.”

James Hardie: Brand and pricing strength

Morningstar increased its fair value estimate for James Hardie following a stronger-than-expected fiscal 2024 first-quarter result. While the results reflected a lower Australian dollar, Hodge notes that the result was also underpinned other factors. These included a stronger near and longer-term margin in the United States and “a less severe medium-term volume downturn since the housing market is holding up better than we expected in early 2023”.

“Deflation from pulp and freight, alongside the price increases, supported first-quarter margins. The easing cost tailwind should continue for the rest of fiscal 2024,” Hodge says.

Furthermore, the strong brand, which alongside cost advantages underpins James Hardie’s wide moat, enabled higher prices despite year-on-year volume declines.

“We think this reflects the brand and pricing power of the business.”  

BlueScope: Cost advantages

BlueScope’s underlying profit was down nearly 60% from last year’s record, but in line with Morningstar’s forecast.

“It seems strange given the size of the decline, but the result is strong and reflects profitability only seen with the extraordinary COVID-19-induced steel prices and margins,” Hodge says.

Hodge believes its North Star steel mill in Ohio has “traces of cost advantage” given it’s a natural scrap collection point and has customers close to the mill.

“We now expect North Star profits to remain broadly in line with fiscal 2023 levels and the decade-ended fiscal 2023, excluding the bonanza year of fiscal 2022.”

That year reflected steel shortages, trade dislocations, unprecedented margins, and fiscal stimulus.

“Nearer-term, we still expect earnings to fall but now expect a slower decline given margins and volumes are holding up better than we expected.”