Nicholas Grove: I'm Nick Grove for Morningstar and today I'm joined by Peter Warnes, who is here to discuss the implications of the recent FY16 earnings season.
Peter, thanks for your time today.
Peter Warnes: Good to be back, Nick. We've survived another one.
Grove: First of all, Peter, in your Earnings Season Insights report you say that the recent earnings season was a little bit better than generally expected, even though expectations were pretty subdued. But in your opinion which companies delivered the most pleasing surprises?
Warnes: Yeah, Nick, look the bar was set pretty low and the confessional period wasn't all that significant. A lot of companies had kind of pre-warned much, much earlier this year and so the market wasn't expecting any fireworks in this reporting season. The economic conditions aren't all that buoyant and so expectations were down, if you like.
There were some good reports, having said that, and what we did this time around, we introduced what we call Initial Market Reactions. So any stock that moved by more than 5 per cent within the 24 hours after that announcement, we gave it a strongly positive rating, meaning that it beat expectations quite comfortably and the market was surprised. So, they are the stocks that you want to look at and focus on and say, okay, well, they've done really well in a pretty ho-hum kind of environment.
And it shouldn't be any great surprise that healthcare again was up there putting its hand up. Sonic, Ramsay and Ansell--Ansell more so probably with a corporate suggestion that they may well withdraw condom manufacture--but earnings-wise Ramsay and Sonic certainly better than the market was looking for and they were up nicely.
Elsewhere in other financials, we had Computershare, IRESS, Genworth--all much better than we looked at--and in the wealth managers Magellan. And so, they were again strongly positive and ones that the market accepted with open arms.
Other spots, Ardent Leisure, and again, that's probably not much earnings-driven but more that they were selling the gyms and trying to sell the marinas and put all the money on Main Event, which is, the questions still have to be asked there. Cleanaway was a good result, much, much better than the markets expected. Elsewhere Orora, the packaging company, was good. And on the retailers, JB Hi-Fi, again shooting the lights out, getting the benefit of Dick Smith's capitulation, if you like, and that was a very, very good result.
Now, so they were the surprises in a fairly kind of moderate reporting season. There were negatives, but we always have those. But overall, there were some quite solid results.
Grove: Peter, do you think there's good value to be found among the blue chips at the moment or are they well and truly overpriced?
Warnes: Well, Nick, the market is stretched and we've been saying that for a little while. A bit too much complacency has been drifting into the market. Low volatility or ho-hum, bond yields are okay and what have you. This week we've got a bit of a correction on (I suspect). Look, there's always going to be value in the market. It's a matter of being able to identify it and of course then make sure that you are getting compensated for the risk you're taking. So, look, we still are positive on the four major banks. Yes, there will continue to be market-driven negative sentiment around bad debts and they will rise, increasing regulatory environment, more capital and so you have to realise that that's going to be ever-present I suspect for quite a while now.
But we still think there's good long-term value in the banks. In Telstra--we also continue to like Telstra, again strong free cash flow, albeit that it's going to be trimmed by $1 billion a year for the next three years as they make sure and ensure that their mobile network is the number one network in the country and that's the big cash cow. But having said that, their free cash flow will still be able to meet the dividend requirements.
Vocus we like and of course, maybe you wouldn't put it in the blue-chip category but by gee it's starting to shoot some lights out with the acquisitions they have made and it's a big player now in that field.
Grove: Finally, Peter, which stocks and which sectors do you think will experience the strongest tailwinds over the remainder of FY17?
Warnes: Yeah, Nick, that's a good question and it's what we're all looking for, isn't it, where are the winners, if you like, and outperformance for the market? Look, I would still be comfortable with running with the demographic, where the demographic tailwinds favour those companies, because with low inflation and with an economy that really is still struggling in terms of growth. Yes, I mean, the GDP growth numbers might look okay but they are not really. Underlying growth is not all that flashy. So, top-line growth is going to be hard to come by.
So, you go back to where the demographics are in your favour and that continues to be the ageing population, so where are you? You're still in the healthcare. What were the surprises in the reporting season you think? I said healthcare was there. So, I suspect that if we get this pullback in the market that's where you go fishing. Wait for the stocks to come back to where you want to buy them. So, the Ramsays, Sonics and CSLs and the ResMeds, they are the stocks that you should be looking for.
Elsewhere on that tailwind, Crown, tourism, casinos, theme parks, we like Village Roadshow--a big discount to our fair value. Again, ageing population, uncertain markets, annuity sales--Challenger. Wait for these things to come back into your buy zone. Have your list there. When they hit those prices where you believe that you are getting compensated for the risk you're taking, then you go and move in. So, go with the demographics, go where the tailwind is. It's not the environment to start battling headwinds.
Grove: Peter, thanks very much for your time today.
Warnes: Pleasure, Nick.
Grove: I'm Nick Grove for Morningstar. Thanks for watching.