05 September 2017

    Numbers are only half the story

    Frank Jasper reflects on the most recent round of company results and why the devil is often in the detail

    Remember the days of the schoolyard. Exam results. Sweaty palms, a beating heart, the thrill of success, the worry of failure. For our Portfolio Managers, the “reporting season” has echoes of exam results. Reporting season is that time of the year when companies announce profit results for the past six months or, in the case of the United States, the past quarter.

    When we invest in a company we develop a clear road map of where we think that company is heading. We look at this primarily from a strategic perspective. What is a company doing to beat its competition, how will it sell more goods and services and can it improve profit margins? The litmus test of strategy is profitability. A good strategy means over time a company earns higher profits and higher profits mean a higher share price and happy investors.

    Reporting season is one of those litmus tests. It helps us assess if a company remains on the road to investment success or if things are beginning to stray. This is often a time that we make active changes to our portfolios.

    While the media commentary on company results often looks at the headline numbers the real insights may be buried much deeper. On the surface Freightways, the New Zealand based courier and document storage company, downgraded earnings expectations for next year. In a knee jerk reaction the market sent Freightways shares down. For us this was an opportunity. Freightways profitability next year is impacted by investments the company is making in more airfreight and warehouse capacity. These will fuel future growth and result in a more valuable business.

    Australian producer of four wheel drive vehicle accessories and components, ARB, is a great example of a company that has gone through an investment phase opening up new warehousing capacity in export markets, new stores in Australia and adding to sales capacity. This investment was at the heart of why we recently invested in the company and is now beginning to pay off. Export sales, in particular, were up a pleasing 14.3% over the year. The share market loves growth and ARB was rewarded with a nice share price jump.

    Sometimes reporting season can be a chance to see if decisions we have already made were right. In May, we exited our investment in US based telephone headset company Plantronics. The promise of investing in Plantronics was based on companies adopting “Unified Communications”; in short, moving away from traditional phones to using internet based telephony like Skype. While this is undoubtedly where the world is heading, we become cautious that the transition was happening very slowly. This fear was confirmed by a number of industry experts we spoke to in the United States. We exited Plantronics. The company just posted poor results and the stock fell 20%. Sometimes a dollar saved is just as important as a dollar earned.

    Overall it was a good reporting season, with more passes than fails. That said, where managing a portfolio is different than the old schoolyard is that we get to retake the exam over and over again. Each results season is a chance to actively manage our portfolio and to drive for even better results next time. Great results are the best way to slow that beating heart.