Over the last few months, eight times as many ASX-listed companies have downgraded as upgraded. That’s an alarming figure, and reveals a serious decline in business conditions. The mission for all investors is to try to avoid companies issuing further downgrades.
Back in mid-February, waste collection and recycling business Bingo Industries announced its 2019 profits would be broadly in line with the previous year. The announcement represented a downgrade to its previous guidance for a 15-20 per cent increase in profits and it attributed the revision to a faster than anticipated softening in multi-dwelling residential construction activity, the absence of a price rise and a delay to the reopening of its Mortdale recycling facility. The share price fell 50 per cent the day the company downgraded guidance.
The decline in residential construction activity is well entrenched, and it’s accelerating as it catches up to a 40 per cent plunge in building approvals earlier this year. So, there is a real risk, all things being equal, that the trends that caused Bingo to downgrade in February, deteriorate further forcing Bingo to downgrade its 2020 numbers.
Costa Group is another company that downgraded earlier this year and our Senior Analyst Joseph Kim wrote about it here.
And manchester and homewares retailer Adairs share price fell 22 per cent on Friday 21 June, as the business succumbed to the slump in construction and sale of new homes, announcing like-for-like sales growth since 27 May has been flat and well below the nine per cent growth delivered in the second half of the year up to 27 May.
A quick review of companies that upgraded and downgraded in the last few months by our friends at stockbroker Morgans reveals a disturbing trend; eight times as many companies have downgraded as upgraded.
Figure 1. Sobering List
|ALL (May)||ABC (May)||DHG (April)||NUF (April)|
|AMS (May)||ACF (May)||FLT (April)||PDL (May)|
|GBT (June)||AHG (May)||GNC (May)||REG (June)|
|REA (May)||APE (May)||IPL (May)||RWC (May)|
|ATL (May)||KPG (May)||SGH (June)|
|BLX (April)||LNK (June)||SWM (May)|
|BWX (May)||MAI (May)||TRS (May)|
|CGC (May)||MQG (May)||VAH (May)|
|CGF (June)||MTO (May)||WES (June)|
|CPU (May)||MYX (May)||WGN (April)|
|CTX (June)||NTD (May)|
The list reveals far more companies are experiencing an adverse adjustment to their trajectories than those that are experiencing an improvement. It at least partly explains why the RBA has shifted its policy settings towards more cuts.
The list is also useful for investors as it not only reveals a deterioration in conditions for a variety of sectors but it can also provide a source of companies investors might think about avoiding. If the conditions that caused a particular company to downgrade have deteriorated further, there is the possibility that a particular company could be a repeat offender.
Take a look at the list of domestic companies above and ask yourself if their sector is still cycling through tough conditions. Then ask whether the company has done enough with its 2020 guidance to reflect the real world.