1 00:00:05,920 --> 00:00:08,640 Speaker 1: Welcome to the Fear and Greed business Interview. I'm Sean Almer. 2 00:00:08,760 --> 00:00:12,200 Speaker 1: For the third year running, earnings of Australia's largest companies 3 00:00:12,240 --> 00:00:14,960 Speaker 1: are set to shrink this earning season. This morning Star 4 00:00:15,080 --> 00:00:18,639 Speaker 1: predicting another one percent contraction for the ASEX twenty for 5 00:00:18,720 --> 00:00:23,360 Speaker 1: many companies. Current stretched valuations don't really reflect the growth outlook, 6 00:00:23,600 --> 00:00:26,080 Speaker 1: but there are still opportunities in the market for investors. 7 00:00:26,120 --> 00:00:28,680 Speaker 1: Of course, the information in this episode is general in nature. 8 00:00:28,720 --> 00:00:31,640 Speaker 1: It does not take into account your own circumstances. You 9 00:00:31,680 --> 00:00:33,880 Speaker 1: should do your own research and see professional advice before 10 00:00:33,920 --> 00:00:37,880 Speaker 1: making investment decisions. Lachlan Halloway is the equity market strategist 11 00:00:37,960 --> 00:00:40,640 Speaker 1: at morning Star. Lachlan, welcome back to Fear and Greed. 12 00:00:40,760 --> 00:00:44,480 Speaker 1: Thanks having sure, So what are you forecasting this earning season? 13 00:00:44,520 --> 00:00:46,400 Speaker 1: It kind of kicks off in the next couple of weeks. 14 00:00:46,800 --> 00:00:50,319 Speaker 2: Yeah, Look, it's going to be another fairly muted year 15 00:00:50,360 --> 00:00:53,480 Speaker 2: for ernest growth from the ASEX on our reckoning looking 16 00:00:53,520 --> 00:00:55,960 Speaker 2: at a one percent to climb in earnings. That would 17 00:00:55,960 --> 00:00:58,760 Speaker 2: be the third straight year falling earnings for the largest 18 00:00:58,800 --> 00:01:02,000 Speaker 2: comers in the AX count for about two thirds of 19 00:01:02,560 --> 00:01:04,760 Speaker 2: all earnings on the ASEX. So they're very much a 20 00:01:04,800 --> 00:01:07,480 Speaker 2: bell weather for the broader market. A big part of 21 00:01:07,520 --> 00:01:10,200 Speaker 2: that is the mining companies coming off the highs of 22 00:01:10,240 --> 00:01:13,360 Speaker 2: the post COVID commodity boom and the other large sector 23 00:01:13,440 --> 00:01:16,520 Speaker 2: on the ASEX. The banks don't nearly have enough earnings 24 00:01:16,560 --> 00:01:19,520 Speaker 2: power to account for that loss. So another fairly modest year, 25 00:01:20,000 --> 00:01:21,840 Speaker 2: and we'd probably argue that the outlook isn't all that 26 00:01:21,920 --> 00:01:22,959 Speaker 2: much more exciting either. 27 00:01:23,400 --> 00:01:25,320 Speaker 1: So we'll get to evaluation in a moment. But what 28 00:01:25,680 --> 00:01:28,400 Speaker 1: is the outlook? He said, it's not that exciting? 29 00:01:28,840 --> 00:01:32,280 Speaker 2: Why is that? So we're still expecting further cooling off 30 00:01:32,520 --> 00:01:35,959 Speaker 2: in our earnings amongst the energy producers and the big miners. 31 00:01:35,959 --> 00:01:39,399 Speaker 2: For the banks, we're looking at low to mid single 32 00:01:39,400 --> 00:01:43,200 Speaker 2: digit earnings growth again, not enough to offset the slumping 33 00:01:43,360 --> 00:01:47,960 Speaker 2: mining profits. We're expecting two percent nominal earnings growth in 34 00:01:48,000 --> 00:01:50,920 Speaker 2: fiscal twenty twenty six and twenty seven. It's probably going 35 00:01:51,000 --> 00:01:53,600 Speaker 2: to be sub inflationary, so in real terms, that means 36 00:01:53,640 --> 00:01:56,160 Speaker 2: earnings going backwards again for the foreseeable future. 37 00:01:56,920 --> 00:02:00,480 Speaker 1: So explain to me, then, Lachlan, why we have market 38 00:02:00,520 --> 00:02:03,920 Speaker 1: trading near a record high with the banks doing particularly well. 39 00:02:03,960 --> 00:02:06,000 Speaker 1: Having mentioned I mean they have come off a little 40 00:02:06,240 --> 00:02:08,240 Speaker 1: in more recent weeks and the mine it's picked up. 41 00:02:08,400 --> 00:02:10,880 Speaker 1: But why is our market doing so well if the 42 00:02:11,000 --> 00:02:11,919 Speaker 1: outlook is that. 43 00:02:12,240 --> 00:02:16,800 Speaker 2: Poor, Well, it's something of a puzzle. From a fundamental perspective. 44 00:02:17,280 --> 00:02:20,280 Speaker 2: The recent weakness and earnings is kind of in the 45 00:02:20,280 --> 00:02:22,520 Speaker 2: review mirror, and of course markets are forward looking, but 46 00:02:22,800 --> 00:02:26,120 Speaker 2: as I mentioned, the outlook isn't all that exciting either. 47 00:02:26,240 --> 00:02:29,240 Speaker 2: I mean for something like common off bank mid singles 48 00:02:29,400 --> 00:02:31,680 Speaker 2: earnings growth, which I think is reasonable assumption and broadly 49 00:02:31,639 --> 00:02:34,440 Speaker 2: in line that the market thinks that wouldn't usually justify 50 00:02:34,720 --> 00:02:37,120 Speaker 2: a price to earnings multiple of thirty times and a 51 00:02:37,120 --> 00:02:40,320 Speaker 2: price to book at four but investors seem willing to 52 00:02:40,360 --> 00:02:42,959 Speaker 2: pay that much nowithstanding a recent pullback in the case 53 00:02:43,000 --> 00:02:46,799 Speaker 2: of CBA. There have been plenty of explanations offered as 54 00:02:46,800 --> 00:02:49,200 Speaker 2: to why these blue chips have run so hard. You know, 55 00:02:49,320 --> 00:02:53,040 Speaker 2: flight to safety, their quality names, you know, passive money, 56 00:02:53,080 --> 00:02:56,320 Speaker 2: international fun flows, super you name it. These are all 57 00:02:56,320 --> 00:02:59,800 Speaker 2: sort of technical, non fundamental reasons, and they might be 58 00:03:00,000 --> 00:03:02,799 Speaker 2: awarding share price of these stocks in the short term 59 00:03:02,760 --> 00:03:05,239 Speaker 2: and the long run. We think evaluations and the fundamentals 60 00:03:05,240 --> 00:03:06,040 Speaker 2: a what matter most? 61 00:03:06,880 --> 00:03:09,680 Speaker 1: What about the big switch? And I don't know whether 62 00:03:09,720 --> 00:03:11,960 Speaker 1: that's probably not the right way to call it. But 63 00:03:12,360 --> 00:03:15,919 Speaker 1: in recent weeks, outside Air and Zed, the other three 64 00:03:15,960 --> 00:03:20,040 Speaker 1: major banks have gone backwards. The miners, particularly for to Skew, 65 00:03:20,639 --> 00:03:23,519 Speaker 1: but also the healthcare companies, companies like CSL have done 66 00:03:23,840 --> 00:03:27,679 Speaker 1: very well. Do you think that investors are I mean 67 00:03:27,800 --> 00:03:30,760 Speaker 1: the big switches on or it's something else? 68 00:03:31,280 --> 00:03:33,679 Speaker 2: Well, I think certainly short term, it's fair to I 69 00:03:33,720 --> 00:03:37,120 Speaker 2: have seen a switch. You know that the banks broader speaking, 70 00:03:37,160 --> 00:03:41,880 Speaker 2: have retreated. We've since strong flows towards the miners around 71 00:03:42,000 --> 00:03:43,760 Speaker 2: you know, so sentiment driven stuff to do with that 72 00:03:44,280 --> 00:03:49,920 Speaker 2: big megaproject announced into bet fueling optimism around iron or 73 00:03:50,400 --> 00:03:52,640 Speaker 2: you know, whether this is sort of sustainable. I guess 74 00:03:52,760 --> 00:03:55,360 Speaker 2: rotation or switches is a bit harder to tell. I'm 75 00:03:55,360 --> 00:03:57,800 Speaker 2: in Back in February and March, we's all something similar happen, 76 00:03:57,880 --> 00:03:59,560 Speaker 2: and you know a lot of analysts were saying, well, 77 00:03:59,560 --> 00:04:01,440 Speaker 2: this might be the start of the great rotation. It 78 00:04:01,520 --> 00:04:03,400 Speaker 2: wasn't to be kind wealth and end up surging to 79 00:04:03,440 --> 00:04:06,200 Speaker 2: a record high not long after that. So look, we're 80 00:04:06,240 --> 00:04:09,000 Speaker 2: not I supposing the business of calling is this the rotation? 81 00:04:09,200 --> 00:04:11,120 Speaker 2: Is it happening now? Is gonna happen? In a few months. 82 00:04:11,160 --> 00:04:15,360 Speaker 2: But certainly, again from that fundamentals angle, there's a lot 83 00:04:15,440 --> 00:04:19,159 Speaker 2: more appeal in miners right now than overpriced banks, so 84 00:04:19,160 --> 00:04:20,839 Speaker 2: in the long term that should win out. 85 00:04:21,640 --> 00:04:24,840 Speaker 1: Okay, what about as we go into earning season. I mean, 86 00:04:24,880 --> 00:04:26,800 Speaker 1: I'm not too about specific stocks, will come to them 87 00:04:27,040 --> 00:04:29,560 Speaker 1: for the break, but what are you looking for and 88 00:04:29,560 --> 00:04:31,600 Speaker 1: what are enalysts looking for? Will there be a lot 89 00:04:31,640 --> 00:04:34,640 Speaker 1: of commentary about rates, about tariffs and the effect they 90 00:04:34,680 --> 00:04:37,880 Speaker 1: have about international economics, What are you looking for? 91 00:04:38,400 --> 00:04:41,359 Speaker 2: Look, I'm sure almost every call will involve something to 92 00:04:41,400 --> 00:04:44,159 Speaker 2: do with tariffs, particularly for those globally focused businesses. That 93 00:04:44,279 --> 00:04:47,120 Speaker 2: is and is the topic of the year, and it's 94 00:04:47,160 --> 00:04:51,000 Speaker 2: still largely unresolved, so we'll be looking for that. I 95 00:04:51,080 --> 00:04:52,880 Speaker 2: think the other thing too is going to be ongoing 96 00:04:53,120 --> 00:04:55,080 Speaker 2: cost pressures and inflation. It's kind of taken a bit 97 00:04:55,080 --> 00:04:57,920 Speaker 2: of a back seat recently, and good to see there's 98 00:04:57,920 --> 00:05:00,240 Speaker 2: a bank having largely got in place under control, but 99 00:05:00,440 --> 00:05:02,960 Speaker 2: certainly there still are some pockets of the market that 100 00:05:02,960 --> 00:05:06,279 Speaker 2: will be facing cost pressures, particularly on the wages side, 101 00:05:06,279 --> 00:05:09,280 Speaker 2: which haven't cooled off as much as broad inflation has, 102 00:05:09,360 --> 00:05:12,279 Speaker 2: so we'll be looking there too. But I mean certainly, 103 00:05:12,320 --> 00:05:16,240 Speaker 2: it's very hard to make short term forecasts, particularly for 104 00:05:16,240 --> 00:05:19,960 Speaker 2: global exposed businesses with so much uncertainty there around Jeer, 105 00:05:20,040 --> 00:05:21,080 Speaker 2: politics and trade. 106 00:05:21,520 --> 00:05:27,279 Speaker 1: Stay with me, Lachland. We'll be back in a minute. 107 00:05:30,279 --> 00:05:33,600 Speaker 1: My guest this morning is Lachland Halloway, equity market strategist 108 00:05:33,640 --> 00:05:35,840 Speaker 1: at morning Star. We kind of went through the big 109 00:05:35,920 --> 00:05:38,039 Speaker 1: picture ahead of the break. Let's talk about some of 110 00:05:38,040 --> 00:05:41,080 Speaker 1: the stocks that you've nominated that are worth taking a 111 00:05:41,080 --> 00:05:44,160 Speaker 1: look at, starting with one of my all time favorites 112 00:05:44,320 --> 00:05:46,520 Speaker 1: because I didn't work for the many many years ago 113 00:05:46,920 --> 00:05:49,400 Speaker 1: and ever since then they seemed to have gone worse 114 00:05:49,440 --> 00:05:51,040 Speaker 1: and worse, Domino's Pizza. 115 00:05:51,640 --> 00:05:54,720 Speaker 2: Yeah. Look, Domino's. It's a bit of a contrarian one. 116 00:05:55,600 --> 00:05:59,360 Speaker 2: It's very much an unalved stock on the ax, which 117 00:05:59,400 --> 00:06:01,800 Speaker 2: is complete trust. Where it was, say three years ago, 118 00:06:01,839 --> 00:06:04,240 Speaker 2: when I was on a P sixty and was a 119 00:06:04,320 --> 00:06:08,360 Speaker 2: high flying market darling, that's completely changed now. I mean. 120 00:06:08,760 --> 00:06:11,640 Speaker 2: The frustrating thing with Dominoes is recently, of course, that 121 00:06:11,720 --> 00:06:15,480 Speaker 2: we saw this another about of turmoil in terms of management, 122 00:06:16,080 --> 00:06:18,560 Speaker 2: with Van Dijck announcing he'll leave the business at the 123 00:06:18,600 --> 00:06:20,480 Speaker 2: end of the year after a fairly short stint at 124 00:06:20,480 --> 00:06:24,040 Speaker 2: the Helm and before he announced a much away to 125 00:06:24,120 --> 00:06:28,039 Speaker 2: strategic update regarding the outlook of the business. You know, 126 00:06:28,240 --> 00:06:30,800 Speaker 2: they did some some rationalizing, some cost cutting, which was good, 127 00:06:30,839 --> 00:06:33,200 Speaker 2: but we do want more clarity on the outlook. Nonetheless, 128 00:06:33,200 --> 00:06:35,560 Speaker 2: we still think the Dominoes you know, as an attractive 129 00:06:35,560 --> 00:06:38,200 Speaker 2: and compelling investment opportunity because at this point you really 130 00:06:38,200 --> 00:06:41,560 Speaker 2: don't have to assume anything about growth to make the 131 00:06:41,560 --> 00:06:44,599 Speaker 2: investment case workout. It is priced basically for no more 132 00:06:44,640 --> 00:06:49,360 Speaker 2: stores and no margin expansion here, so even modest improvements 133 00:06:49,400 --> 00:06:52,440 Speaker 2: in terms of the store all out and cyclical recovery 134 00:06:52,480 --> 00:06:56,039 Speaker 2: and store profitability should hopefully to that business rerate to 135 00:06:56,080 --> 00:06:57,520 Speaker 2: appropriately high multiples. 136 00:06:58,160 --> 00:07:00,880 Speaker 1: What about Ramsy Healthcare, It's a stock that has had 137 00:07:00,880 --> 00:07:03,920 Speaker 1: a rough few years of a more sort of recent 138 00:07:04,400 --> 00:07:06,400 Speaker 1: weeks slash month, it's done a bit better. 139 00:07:07,440 --> 00:07:10,200 Speaker 2: You also like it, Yeah, that's right. And the story 140 00:07:10,240 --> 00:07:13,160 Speaker 2: there in terms of the earnings outlook is mainly driven 141 00:07:13,200 --> 00:07:17,560 Speaker 2: by cost efficiencies and reduction in cost precious rams. He 142 00:07:17,560 --> 00:07:21,880 Speaker 2: has obviously been subject to a fairly significant squeeze in 143 00:07:21,960 --> 00:07:24,240 Speaker 2: terms of margins due to wage cost increases that we 144 00:07:24,320 --> 00:07:26,960 Speaker 2: see that coming out, and when we get a recovery 145 00:07:27,440 --> 00:07:30,960 Speaker 2: in activity that should drive operating leverage and you know, 146 00:07:31,200 --> 00:07:33,680 Speaker 2: above market EPs growth for that business. 147 00:07:34,280 --> 00:07:37,559 Speaker 1: Okay, what about babcoor tough end of week last week 148 00:07:37,640 --> 00:07:41,400 Speaker 1: where it downgraded its outlook and its share price. It 149 00:07:41,440 --> 00:07:42,600 Speaker 1: was sold off pretty sharply. 150 00:07:42,960 --> 00:07:45,640 Speaker 2: That's right. Look, that was a really tough trading update. 151 00:07:45,680 --> 00:07:48,640 Speaker 2: Conditions were weaker than we expected, and obviously the market 152 00:07:48,680 --> 00:07:52,640 Speaker 2: it expected in the retail business and its specialist business. 153 00:07:53,440 --> 00:07:56,640 Speaker 2: The turnaround probably going to take longer than we anticipated, 154 00:07:56,840 --> 00:08:00,000 Speaker 2: and perhaps a long run outlook for margins as an 155 00:08:00,360 --> 00:08:03,000 Speaker 2: as nos ros as we once thought. That being said, 156 00:08:03,000 --> 00:08:06,120 Speaker 2: we still see the turnaround story there, and it's the 157 00:08:06,240 --> 00:08:08,960 Speaker 2: trade business, which is really the best part of that business. 158 00:08:09,320 --> 00:08:11,480 Speaker 2: You know, it is really what drives our view, and 159 00:08:11,640 --> 00:08:13,760 Speaker 2: that's that's where we see the focus in terms of 160 00:08:13,800 --> 00:08:17,480 Speaker 2: the eventual margin uplift and in terms of rationalizing other 161 00:08:17,520 --> 00:08:20,920 Speaker 2: parts of business. I think strategically managements on the right track, 162 00:08:21,080 --> 00:08:23,760 Speaker 2: that business, when it turns around syccally should start to 163 00:08:23,800 --> 00:08:26,360 Speaker 2: shine again. So we still see an opportunity in batcore 164 00:08:26,480 --> 00:08:29,560 Speaker 2: and once again, like Donald's, it's really not price for 165 00:08:29,600 --> 00:08:30,560 Speaker 2: that much at all. 166 00:08:30,880 --> 00:08:32,320 Speaker 1: Okay, what about Igo? 167 00:08:32,880 --> 00:08:35,520 Speaker 2: Yeah, ig O, obviously that's the that's the lithium play. 168 00:08:36,160 --> 00:08:39,040 Speaker 2: Lithium as a commodity has been on really a bit 169 00:08:39,080 --> 00:08:40,880 Speaker 2: of a tail slide for the last few years, coming 170 00:08:40,920 --> 00:08:44,040 Speaker 2: off those that sort of price boom we saw in 171 00:08:44,080 --> 00:08:47,800 Speaker 2: twenty twenty two, and conditions across the industry have been tough. 172 00:08:47,880 --> 00:08:52,560 Speaker 2: We've seen you know, excess supply creating depressed pricing environments 173 00:08:52,600 --> 00:08:57,360 Speaker 2: and many lithium miners in Australia are you know, producing 174 00:08:57,720 --> 00:09:01,120 Speaker 2: below the current prices lithium. We do see that market 175 00:09:01,160 --> 00:09:04,440 Speaker 2: gradually stiying to come back into balance. We're seeing some 176 00:09:04,559 --> 00:09:08,319 Speaker 2: curtailments from both the western producers in Australia and also 177 00:09:08,400 --> 00:09:11,480 Speaker 2: importantly some of the producers in China who have been 178 00:09:11,559 --> 00:09:15,200 Speaker 2: producing uneconomically and keeping prices depressed. The fact that side 179 00:09:15,200 --> 00:09:17,000 Speaker 2: of current of the market should help bring things back 180 00:09:17,040 --> 00:09:20,520 Speaker 2: into balance. And if that plays out, and it's starting 181 00:09:20,520 --> 00:09:22,880 Speaker 2: to play out now, that should you know, lead to 182 00:09:22,960 --> 00:09:25,600 Speaker 2: a recovery in lifting prices and recovery and share price 183 00:09:25,640 --> 00:09:27,120 Speaker 2: of businesses like RGO. 184 00:09:27,720 --> 00:09:30,440 Speaker 1: Yeah, I mean lifting because it has bounced a little. 185 00:09:30,559 --> 00:09:32,360 Speaker 1: The price of lithing has bounced it a little, and 186 00:09:32,400 --> 00:09:36,680 Speaker 1: part of that is on a crack on illegal litheum 187 00:09:36,679 --> 00:09:39,400 Speaker 1: mining and as well as other commodities in China. I 188 00:09:39,480 --> 00:09:42,000 Speaker 1: just I don't quite get that is the Chinese authority 189 00:09:42,040 --> 00:09:44,439 Speaker 1: is just getting a bit tougher around that stuff. 190 00:09:44,840 --> 00:09:48,000 Speaker 2: I think it's probably more about making sure they haven't 191 00:09:48,040 --> 00:09:52,720 Speaker 2: managed grip on liftin production. They're obviously the world's biggest 192 00:09:52,720 --> 00:09:57,920 Speaker 2: electric vehicle market and they are producing or they have 193 00:09:58,080 --> 00:10:02,880 Speaker 2: encouraged their vertically integra battery producers to keep mining you 194 00:10:02,960 --> 00:10:06,360 Speaker 2: know below you know, the prices below costs, so that 195 00:10:06,400 --> 00:10:10,040 Speaker 2: they can keep supply up for the downstream battery manufacturers. 196 00:10:10,400 --> 00:10:12,320 Speaker 2: I think, you know, again, what we'd say is that 197 00:10:12,320 --> 00:10:14,640 Speaker 2: that China doesn't have particularly high quality and to e 198 00:10:14,760 --> 00:10:18,120 Speaker 2: large posits of with them, and eventually that's going to 199 00:10:18,200 --> 00:10:20,880 Speaker 2: run out. And when that does, we should see we 200 00:10:20,920 --> 00:10:22,600 Speaker 2: should see you know, some of the supply com out 201 00:10:22,600 --> 00:10:24,600 Speaker 2: of the market and prices being wall that's brought back 202 00:10:24,600 --> 00:10:27,480 Speaker 2: into balance, which we estimate is about twenty thousand dollars 203 00:10:27,480 --> 00:10:29,480 Speaker 2: a ton for with them, prices are about ten thousand 204 00:10:29,480 --> 00:10:31,719 Speaker 2: dollars a ton, So you know, we're looking at sort 205 00:10:31,760 --> 00:10:35,360 Speaker 2: of you know, a doubling of prices by by mid 206 00:10:35,440 --> 00:10:38,840 Speaker 2: cycle as these these supply pressures start to come out 207 00:10:38,880 --> 00:10:39,360 Speaker 2: of the market. 208 00:10:39,640 --> 00:10:41,440 Speaker 1: Block when we are out of time, but just quickly 209 00:10:41,520 --> 00:10:43,199 Speaker 1: site Minded that's been one that you've liked for a 210 00:10:43,240 --> 00:10:43,920 Speaker 1: little while too. 211 00:10:44,000 --> 00:10:46,160 Speaker 2: That's right. Yeah, we think it's a highly winnable market 212 00:10:46,720 --> 00:10:49,720 Speaker 2: for site Mind. That obviously for booking software for small 213 00:10:49,720 --> 00:10:52,920 Speaker 2: and medium hotels. We see that as a really winnable 214 00:10:52,960 --> 00:10:56,480 Speaker 2: opportunity for them. They're not profitable yet, expecting to be 215 00:10:56,480 --> 00:10:57,960 Speaker 2: in the next few years, and they're one of the 216 00:10:58,000 --> 00:11:00,720 Speaker 2: other growth things they've called out on our best Ideas list. 217 00:11:00,920 --> 00:11:02,680 Speaker 1: Lachlan, thank you for talking to Fear and Greed and 218 00:11:02,880 --> 00:11:03,960 Speaker 1: enjoy earning season. 219 00:11:04,080 --> 00:11:04,720 Speaker 2: Thanks having me. 220 00:11:05,080 --> 00:11:08,840 Speaker 1: That was morning Star equity market strategist Lachlan Halloway. This 221 00:11:09,000 --> 00:11:11,200 Speaker 1: is the Fear and Greed Business Interview. Remember this is 222 00:11:11,240 --> 00:11:14,320 Speaker 1: general information only and you should seek professional advice before 223 00:11:14,360 --> 00:11:17,040 Speaker 1: making investment decisions. Join us every morning for the full 224 00:11:17,080 --> 00:11:19,720 Speaker 1: episode of Fear and Greed, daily business news for people 225 00:11:19,720 --> 00:11:23,400 Speaker 1: who make their own decisions. I'm Sean Almer. Enjoy your day.