Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 81

Company reporting and tired excuses

Two key themes emerged in the 2014 reporting season that many companies attributed to adverse performance: an unseasonably warm winter and weaker consumer confidence after the Federal Budget. Some even cited a combination of the two.

It was easy to relate to this commentary, as autumn and much of winter felt quite warm and there was plenty of negative media interest surrounding the tough budget. But as investors, it’s important to understand if those companies were using temporary issues as an excuse for structural pressures. This concept may seem obvious, but how often is it applied in practice?

Companies always face challenges

Every reporting season is defined by challenges, such as weather, tough budgets, poor consumer sentiment, the threat of higher interest rates, rising unemployment, lower commodity prices, a strong Australian dollar, increased regulation – the list goes on.

But if you held or bought shares in a company after considering that a challenging environment was temporary, did you follow up in subsequent periods to ensure that the company’s operating performance returned to expectations? Or did the company point to another set of factors to explain itself, with no reference to previous commentary?

To illustrate, let’s delve into the commentary of previous periods to understand what challenging (but temporary) conditions were cited for underperformance. The commentary surrounding these market conditions was just as prolific as the unseasonable weather and tough budgetary concerns in FY14.

In 2013 it was claimed that consumers were cautious during the national election. In 2012, some companies pointed to the minority government, a slowing Chinese economy and European instability to justify their disappointing performance. In 2011, weaker conditions were caused by the carbon tax debate, uncertainty in international financial markets and domestic natural disasters. In 2010, the challenges took the form of abnormal weather and interest rate increases by the RBA.

While many of these events may seem like distant memories, they may have influenced your investment decisions. When viewed with an historical perspective, it can become apparent that temporary events may not be the underlying cause of multiple periods of disappointing results.

External factors versus sustainable competitive advantage

When a company continually attributes operational performance to external factors, it is an admission that it does not have a sustainable competitive advantage. This is much like a boat on the ocean, whose movement is dependent on the coming and going of the tide.

Whenever you buy shares in a company, you should believe the company will sustainably outperform the wider market. But how can you generate excess returns in the long run if a company continually references difficult external conditions?

Top fund managers strive to invest in companies with sustainable competitive advantages that can provide meaningful returns during most stages of the market cycle. While these companies are not immune to challenging market conditions, management will typically reference internal forces, rather than external forces, to justify returns.

The unseasonable weather and budgetary concerns from FY2014 will soon fade from company commentary and the market’s consciousness, and you can be sure that other challenging market conditions will present in the next reporting period for underperforming companies. We hope the moral of this article is more enduring.

 

Ben MacNevin is an Analyst at The Montgomery Fund.

 

  •   26 September 2014
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Creating a bulletproof investment portfolio

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Latest Updates

Planning

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

Superannuation

There's a reason why your super is locked up until your 60s

For decades, it seemed settled. Then one controversial idea reignited a debate that could reshape the financial future of millions. The real question isn’t who’s right or wrong, but whether a long-held assumption deserves another look.

Property

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Retirement

Under-retiring: The greatest retirement risk in a generation

Two retirees. Similar savings. Completely different lives. New research from Challenger reveals why some Australians confidently spend in retirement while others hold back and the overlooked factor shaping retirement decisions.

Five risks to watch in markets

Things you may often hear are: a recession is around the corner, markets are overpriced, the AI sector is about to flop at any moment. It’s like the never-ending laundry pile that sits in my house, it never really disappears.

Investment strategies

Do you qualify as ‘rich’?

What does it mean to be 'rich'? For something so universally desired, it is surprisingly difficult to define. That ambiguity creates a challenge for investors and raises a bigger question about what financial success really looks like.

Investment strategies

If you’re worried about your bond portfolio, you’re missing the point

Most investors think they know what bonds are for. But when markets turn volatile, a surprising misunderstanding can lead to costly decisions. Here’s the overlooked lesson that could change how you view your portfolio.

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.