Morningstar’s view on 3 ASX earnings season winners

Joseph Taylor | Morningstar Australia

Stock markets usually get valuations roughly right. But given that thousands of different companies trade on the share market every day, there are always a few situations where investors seem to have become too optimistic or pessimistic.

Today we are going to look at three companies that reported earnings this week. Markets cheered all three results but our analysts think the stocks currently rate very differently from a valuation perspective.

As Goldilocks might put it, one of the shares look too hot, one looks too cold and one seems just about right. Let’s start with a share price we think is too hot.

Too hot: ARB Corporation (ARB)

• Economic Moat: Narrow
• Fair Value estimate: $27
• Share price August 22: $41.62
• Star rating: ★

ARB sells high-end accessories for four-by-four (4WD) vehicles and SUVs. Think bull bars, snorkels, that kind of thing. The vast majority of ARB’s earnings are generated in Australia, where sales of 4WDs have grown strongly in recent years and consumers are willing to pay a premium to display ARB’s brand on their vehicles.

ARB’s results for fiscal 2024 were fairly good.

The company returned to revenue growth (albeit falling slightly short of its best year of sales in 2022) and saw an 18% increase in underlying profits thanks to better gross margins. ARB’s top-line growth was largely driven by continued strength in the core Australian aftermarket business and a rebound in original equipment manufacturing. This was offset slightly by continued weakness in export markets—particularly the US and China.

Our ARB analyst Angus Hewitt thinks that ARB can continue to grow its earnings – especially in its advantaged Australian business. Nonetheless, he thinks the shares are materially overvalued at current levels.

More specifically, Hewitt thinks that investors are overestimating ARB’s ability to replicate its Australian success abroad, where he sees little evidence that ARB’s products have the same brand equity or pricing power. For example, the company’s operating margins in the US are less than half those enjoyed in Australia.

ARB’s current price of around $41 per share is over 50% higher than Hewitt’s Fair Value estimate of $27. The shares currently have a one-star Morningstar Rating.

Too cold: Healius (HLS)

• Economic Moat: No Moat
• Fair Value estimate: $3.00 per share
• Share price August 22: $1.62
• Star rating: ★★★★★

Healius is the second-largest pathology operator in Australia, with virtually all of its revenue earned from Medicare via bulk-billing.

Our Healius analyst Shane Ponraj expects volume growth in its core pathology business to grow at between 3-5% per year, helped by Australia’s growing population, aging demographics and wider adoption of preventive healthcare.

As Ponraj highlighted earlier this year, sentiment towards pathology shares has suffered from concerns that profit margins won’t recover to levels seen before the pandemic. However, Ponraj took a different view and thinks the bigger players – like Healius – can benefit from stabilising inflation, scale benefits and higher prices for more complex tests.

Healius reported a solid set of annual results. Underlying revenue grew by 6% to $1.7 billion and the group’s $65m in earnings before interest and taxes outpaced Ponraj’s forecast. This was mostly down to improved profit margins in the second half of the year.

Looking ahead, Ponraj kept his long-term estimates for the company largely unchanged. He thinks the company can achieve 5% revenue growth in a typical year and achieve midcycle EBIT margins of 14%. His Fair Value estimate of $3 per share is still around 85% higher than the current price of $1.62, despite a circa 10% rally after the results.

Just about right: WiseTech Global (WTC)

• Economic Moat: Narrow Moat
• Fair Value estimate: $115 per share
• Share price August 22: $117.62
• Star rating: ★★★

WiseTech provides logistics companies the technology they need to digitize. Its core product suite, CargoWise, has become the best-in-class software solution for international freight-forwarding by air and ocean.

WiseTech’s 2024 results were a smash. Two more of the world’s top ten forwarders joined Cargowise, revenues increased by 28% and the company gave stronger than expected 2025 guidance. In short, the WiseTech’s hefty investments in product development appear to be bearing fruit, and the company’s dominance of its niche looks to be solidifying.

Van Keulen continues to see evidence that companies using CargoWise are outperforming their peers due to the efficiency and productivity improvements the platform provides. As a result, he expects CargoWise to become the industry default, either through increased adoption or through existing customers taking market share. He also expects WiseTech to leverage this position into downstream adjacencies like customs and compliance, road and rail, and warehousing.

Our Fair Value estimate of $115 per WiseTech share assumes the firm can grow revenues at 22% per year for the next decade, driven primarily by sales growth in the CargoWise product suite. Van Keulen also thinks the company can keep a higher percentage of its revenues as profits over time, thanks to its ability to raise prices and potentially taper down development spending.

At a current share price of $117, the shares trade roughly in line with Van Keulen’s valuation.

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.
 

Access this research and more at Morningstar. For a free four-week trial, click here.
 

All prices and analysis at 23 August 2024.  This information has been prepared by Morningstar Australasia Pty Limited (“Morningstar”) ABN: 95 090 665 544 AFSL: 240 892.  The content is distributed by WealthHub Securities Limited (WSL) (ABN 83 089 718 249)(AFSL No. 230704). WSL is a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited (ABN 12 004 044 937)(AFSL No. 230686) (NAB). NAB doesn’t guarantee its subsidiaries’ obligations or performance, or the products or services its subsidiaries offer.  This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice.  Past performance is not a reliable indicator of future performance.  Any comments, suggestions or views presented do not reflect the views of WSL and/or NAB.  Subject to any terms implied by law and which cannot be excluded, neither WSL nor NAB shall be liable for any errors, omissions, defects or misrepresentations in the information or general advice including any third party sourced data (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (whether direct or indirect) suffered by persons who use or rely on the general advice or information. If any law prohibits the exclusion of such liability, WSL and NAB limit its liability to the re-supply of the information, provided that such limitation is permitted by law and is fair and reasonable. For more information, please click here.