Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 81

Company reporting and tired excuses

Two key themes emerged in the 2014 reporting season that many companies attributed to adverse performance: an unseasonably warm winter and weaker consumer confidence after the Federal Budget. Some even cited a combination of the two.

It was easy to relate to this commentary, as autumn and much of winter felt quite warm and there was plenty of negative media interest surrounding the tough budget. But as investors, it’s important to understand if those companies were using temporary issues as an excuse for structural pressures. This concept may seem obvious, but how often is it applied in practice?

Companies always face challenges

Every reporting season is defined by challenges, such as weather, tough budgets, poor consumer sentiment, the threat of higher interest rates, rising unemployment, lower commodity prices, a strong Australian dollar, increased regulation – the list goes on.

But if you held or bought shares in a company after considering that a challenging environment was temporary, did you follow up in subsequent periods to ensure that the company’s operating performance returned to expectations? Or did the company point to another set of factors to explain itself, with no reference to previous commentary?

To illustrate, let’s delve into the commentary of previous periods to understand what challenging (but temporary) conditions were cited for underperformance. The commentary surrounding these market conditions was just as prolific as the unseasonable weather and tough budgetary concerns in FY14.

In 2013 it was claimed that consumers were cautious during the national election. In 2012, some companies pointed to the minority government, a slowing Chinese economy and European instability to justify their disappointing performance. In 2011, weaker conditions were caused by the carbon tax debate, uncertainty in international financial markets and domestic natural disasters. In 2010, the challenges took the form of abnormal weather and interest rate increases by the RBA.

While many of these events may seem like distant memories, they may have influenced your investment decisions. When viewed with an historical perspective, it can become apparent that temporary events may not be the underlying cause of multiple periods of disappointing results.

External factors versus sustainable competitive advantage

When a company continually attributes operational performance to external factors, it is an admission that it does not have a sustainable competitive advantage. This is much like a boat on the ocean, whose movement is dependent on the coming and going of the tide.

Whenever you buy shares in a company, you should believe the company will sustainably outperform the wider market. But how can you generate excess returns in the long run if a company continually references difficult external conditions?

Top fund managers strive to invest in companies with sustainable competitive advantages that can provide meaningful returns during most stages of the market cycle. While these companies are not immune to challenging market conditions, management will typically reference internal forces, rather than external forces, to justify returns.

The unseasonable weather and budgetary concerns from FY2014 will soon fade from company commentary and the market’s consciousness, and you can be sure that other challenging market conditions will present in the next reporting period for underperforming companies. We hope the moral of this article is more enduring.

 

Ben MacNevin is an Analyst at The Montgomery Fund.


 

Leave a Comment:

     
banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates

Strategy

$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Strategy

Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.