With another company reporting season concluded during a period of significant global economic volatility and uncertainty, Mirrabooka Managing Director Mark Freeman and Portfolio Manager Kieran Kennedy provide their thoughts on some of the companies and sectors in the Mirrabooka portfolio.
From our long-term investing perspective, the recent 2021/22 company reporting season has given us continued confidence in the stocks that we hold in our portfolio.
The overall tone from companies was one of resilience and we’re generally comfortable with companies in our portfolio and the way they are performing.
Unsurprisingly, businesses are still feeling the impact of common economic themes: rising inflation, continuing supply chain challenges, and cost pressures which have driven up prices. Pressure on supply chains appears to be easing a little, but for companies that are holding a higher volume of inventory, investors are focusing on how that may unwind.
A tight labour market in Australia and overseas presents a challenge for companies as the lingering effects of COVID cause widespread absenteeism and the number of job openings outweigh the number of people seeking work.
Companies showing resilience in face of challenging times
Despite challenging economic conditions, Australian businesses are proving to be resilient. While businesses are wary of what might lie ahead, demand for their products and services appears steady.
Some negativity does surround equity markets and various economies. However, so far, company reports have not reflected this negativity yet.
That’s not to say it’s not coming; we don’t know when inflation might pull back, and rising interest rates may impact consumer demand and business outlook in the next six months. But for FY22 results, the outlook comments were along the lines of “We’re not sure what’s going to happen” rather than “We’re seeing a lot of negatives here now”.
Key metrics such as revenue, profit and dividend were generally in line with or slightly better than market expectations but not meaningfully better.
Revenues were quite strong compared to historical numbers as companies passed on higher costs by increasing prices. This ability to pass on cost increases is an important element in having particular companies in the Mirrabooka portfolio.
Once again, against a negative backdrop, it was not a message of strength but of resilience.
Quality stocks drive our portfolio
This reporting season reinforced our view of the high quality of the companies in our portfolio and their good prospects over our preferred long-term investment horizon.
Online real estate advertising company REA Group and online automotive marketplace Carsales.com both reported pleasing results.
REA’s revenue, profit and dividend grew significantly, and the company enters the new financial year with a clear strategy for future growth. Carsales.com’s Australian and international assets generated a strong financial performance and expectations are for continued strong growth as well.
Two other stand-out companies were automotive accessories supplier ARB Corporation and plumbing and bathroom products supplier Reece.
ARB had a big jump in profit during COVID, and the market was expecting profit to start to ease, however this hasn’t happened, and profit has been resilient. The company has a deal with Ford in the US to co-brand their products and Toyota has agreed to a commercial relationship so the potential in the US market is very encouraging for ARB.
Reece made a large acquisition in the US at the time when concerns about the American economy emerged. Despite the risk, the acquisition has delivered according to plan and the acquired stores will be rebranded Reece, which is a good sign of Reece’s confidence.
Home appliances supplier Breville, financial services technology provider IRESS, and sleep and respiratory care device manufacturer ResMed are also worth focusing on.
Although there is some uncertainty around consumer spending, Breville continues to open new geographical markets with a focus on long-term growth, which gives us some encouragement. The company also has a strong balance sheet, which is another key element in considering the stocks that go into the Mirrabooka portfolio.
IRESS is one of the bigger holdings in the Mirrabooka portfolio and is currently working on new superannuation and administration opportunities that could be very positive for the company.
ResMed impressed us with its commentary around trends within its market and exemplifies our approach to investing in companies that can develop a leadership position in their industry.
A cautious and patient approach
Given the economic background which suggests a challenging time ahead for company earnings, uncertainty around company outlooks and consumer spending, we’re currently cautious in our approach.
However as a long-term investor we can be patient and selectively use short term volatility to take advantage of opportunities that we believe will add value for our shareholders over the long term.