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:

RELATED ARTICLES

Creating a bulletproof investment portfolio

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

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

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Latest Updates

Economy

The ‘priced out generation’ and what they should do about it

A fiery interview on housing exposed deep generational divides, sparking youth outrage and political backlash. As homeownership drifts out of reach, young Australians face a choice: fight the system - or redefine success.

Taxation

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

Superannuation

Meg on SMSFs: Ageing and its financial challenges

Ageing SMSF members can face issues funding their pension income as cash reserves dwindle. Potential solutions include involving adult children in contributions to secure future financial stability.

Economy

US earnings season was almost too good to be true

The second quarter US earnings season has wrapped up, with a record 82% of S&P 500 firms beating earnings estimates. As tailwinds fade, Q3 may reveal whether AI momentum can offset rising economic headwinds. 

Gold

Does gold still deserve a place in a diversified portfolio?

9,000 years and no devaluations later, gold is the world’s most enduring store of value. It remains attractive as the value of several paper currencies, including the US dollar, are threatened by deficits and rising debt.

Shares

Checking in on the equity market's silent engine

Consumer spending directly impacts corporate earnings, sector performance and market sentiment. The latest data from different economies uncover risks and pockets of opportunity for investors.

Fixed interest

6 key themes driving bond markets

The Fed could soon be prompted to join other central banks in cutting interest rates. This would have ripple effects across global fixed income markets and provide an especially attractive backdrop for emerging market bonds.

Sponsors

Alliances

© 2025 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. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. 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.