Does reporting season really matter.

Last month was one of the year’s two big reporting seasons. The majority of listed companies have either a December or June year end, which means that in February and August most companies release either their full year or half year results. This leads to a flood of information for investors and market participants to dive into, should they so choose to. Broking and buy-side analysts alike are typically not allowed to take leave during reporting season such is the workload and the perceived importance of reporting season. They have to keep clients and colleagues updated on any changes that they make to their earnings forecasts as a consequence of the result and any associated earnings guidance that the company has made.

Company results that lead to widespread earnings upgrades are coveted, and often rewarded with a rising share price. Company results that lead to earnings downgrades are often a blight on an investment portfolio as they typically have a falling share price. Hence, the importance that many share market participants place on reporting season. However, long-term investors that typically hold shares in a company for five or more years place far less importance on the potential ramifications of any given earnings season. A good way to explain that approach is to take the example of Capral.

As the chart below shows, Capral’s share price has fallen a great deal from where it traded 20 years ago. At its worst the drawdown represented a 99.5% drop in share price. Some readers might be familiar with Capral as it was listed on the NZX and was a holding in the Guinness Peat Group investment portfolio. It is a simple business, it is Australasia’s largest producer and distributor of aluminium products, and it should make a reasonable profit, nothing dramatic but a reasonable return on equity should be earned. Clearly though, as the share chart demonstrates, decades of underperformance led to a distinct lack of earnings. It was a perfect storm of too much debt, too much production capacity, falling customer demand, increasing offshore competition, onerous leases, excessive senior management renumeration, multiple capital raises, endless losses and abandoned dividends. Hence the 99.5% drop in share price.

Chart showing 20 years of value destruction delivered by Capral