Company Interview / BHP: "The captain on an oil tanker going downstream..."

Key points:

Earnings season shows large volatility, with significant swings in stock performancesBanks experience gains, driven by international institutional investmentsCaution advised in the resources sector, pending a turnaround in commodity prices

Marcus Padley from Marcus Today observes significant volatility during the current earnings season. He notes that while some companies have had substantial swings, with around 270 results reviewed, 60 stocks either rose or fell by more than 5%, and 30 by more than 10%.

Highlighting the banks, Marcus mentions that Commonwealth Bank (ASX:CBA), NAB (ASX:NAB), and Westpac (ASX:WBC) have shown gains, while ANZ (ASX:ANZ) remains steady. He attributes the inflow of money into the banks to international institutions, rather than domestic investments, as resources continue to face downward trends.

On the resources sector, Marcus advises caution, especially with companies like BHP (ASX:BHP), suggesting the need for a substantial turnaround in commodity prices driven by China’s economic improvements. He also touches on energy markets, noting unpredictable trends in uranium and lithium.

Full unedited transcript:

0:00

Well, let's get across what we're seeing in earnings at the moment. And more broadly also particularly with the focus on the states. Marcus Padley joining us from Marcus today. Marcus good to catch up with you again. Let's start locally then. Since we last spoke, which is about a week ago or so, what are some of the highlights or even lowlights that you've seen?

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Uh, Andrew, one of the highlights is watching you handle a plethora of results on camera without flinching. Well done, old boy. Uh, I, I just don't know. I could do that. Um, uh, quite a skill. Uh, right. Some of the highlights, uh, is obviously the results season and the volatility. I've clocked about 270 results on my spreadsheet, and out of those, 60 have dropped more than 5%, 60 have risen more than 5%, 30 have dropped more than 10% and 30 risen more than 10%. So the, uh, this results season is like running around on a battlefield in a fluoro vest. You never quite know when you're going to get blown up. And I think in a world of, uh, continuous disclosure where companies used to remember, we used to have a confession season, people used to manage expectations. And as we go further, I think companies have just given

1:18

up on the confession season and said, look, legally we have to dump it all in the results. Let's just wait till the results. And so we're now getting a very dangerous period during results season. And, uh, this season has been, uh, no different. Uh, highlights would be the banks. I think Commonwealth Bank has gone ex-dividend, uh, interestingly, when ex-dividend 250 cents, if you include franking, it was 350 $0.07 and it dropped exactly 350 $0.07 on the day it went ex-dividend. And despite that, it's up another 3.3% since. And we've also had NAB up 3.6% since their quarterly result. Westpac up 2.6%, ANZ unchanged. So the highlight has been the money keeps pouring into the banks. Part of the reason for that is not because domestic institutions are doing that. I think as the money comes into Australia, all the international institutions are just filtering it into the banks and

2:18

not the resources, because the resources are just in a downtrend at the moment. So the features would be good results from the top end of our market. BHP was up on results yesterday. Uh, ResMed um, up 10% since its results and up again today. Uh, all of them. Telstra Woodside, Transurban Wisetech up 25%. Aria up 15%, brambles up 12% since results. So the top end of the market, uh, performing well. And the only disappointment really in the big stocks was uh, Goodman Group down 6% since results. And the results are absolutely fine, I think it's just more of an AI top out. So I think the message is good results from the stocks that matter in the result season. Marcus, what do you make of that BHP result? In fact, I caught up with the CFO yesterday. You look at some of the headlines that's saying it's clear the iron ore boom is over. The company's refocusing now on those future facing commodities such as

3:18

copper. Look, I haven't ruled out coming back to Anglo American at the end of the year to try and boost their their copper resources. Overall, what are you seeing? I guess particularly given iron ore is coming off

3:32

Andrew a well accept I've said this before, but one of the well-accepted, uh, truths of investing in resources in Australia, any major fund manager will tell you is that if you look backwards at, uh, earnings per yields, even at forecasts, uh, uh, they will mislead you. The only thing that is going to an investor is going to need to get BHP right or Rio or Fortescue, uh, is uh, to predict what the the underlying commodity prices are going to do in this case, iron ore, uh, coal. So, uh, you could do as much research as you like. You could go out to the Brazilian subsidiary of BHP and work out what its return on equity was. Isn't going to do you the blinders bit of good. Uh, nor is a broker recommendation unless they've got the iron ore price. Right. So you have to work out which way the iron ore price is going from here. Uh, the big driver, of course, is the Chinese economy, which just

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continues to disappoint every time. Resources have a bit of a blip up. Uh, there's talk about, uh, in the news wise, making up excuses after the fact about Chinese stimulus. Uh, the resources have had a little bit of a rally in the very short term. That's because the US dollar is coming off, which is lifting commodity prices a bit. We've had a good day or two in lithium and uranium, which is just immediately faded out. I would say to you that there is no reason to be in resources at the moment, until there is some major pivot point on commodity prices. The US dollar dropping isn't enough. Uh, we need some sort of, uh, reasonable expectation that the iron ore price, coal price, metal prices are going to go up. And that's really from our point of view, going to require China to kick. And there's no sign of that. Uh, so I would just avoid, uh, BHP at the moment. The company, the company, uh, they can't do anything about it. They are, they are like, um, uh,

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captains on a on an oil tanker going downstream. You know, they've got to go with the with the commodity prices. And the stream at the moment is going in the wrong direction. So they're just in a void at the moment until there's a material pivot point. Okay. So avoid resources. What about energy markets. In fact we had Woodside out today a bit. Oil and gas uranium back in favour. It seems, after falling dramatically last week. Yeah, no, there's no material turn in the, uh, uranium price either or or the lithium price. You see all this stuff going on? Uh, China is, is, uh, over supplying the world with electric vehicles. Now, uh, hybrids are becoming more popular. The the world is against the EV excitement and lithium. So I don't think that's going anywhere for a while. We need a material turn in these uranium lithium prices. And, uh, the oil price. I have to tell you, I have tried to get these stocks right, but the oil price, uh, depending on OPEC, Saudi's production,

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uh, statements, uh, become very unpredictable. And they're hard to get right in the longer term. Uh, it's not an easy, easy sector to get right. And, uh, it's always short term. There's something every day, uh, it's very hard to get the longer term trend right. And Marcus, just a word on a big result coming to us tonight out of Wall Street with Nvidia. How critical is that result going to be

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seeing in the US market, do you think? Well, you know, my colleague Henry Jennings has described it as, uh, Nvidia needs to stick a four and a half somersault, uh, with a reverse twist and land it perfectly for the market to like it. Expectations are so high, even if we we know their profit numbers are going to be fabulous. Up 113% on revenue. Can you believe it? We know the huge CapEx going into, uh, AI, large language learning models and the CapEx is there. Um, I don't think Nvidia is going to tell us much about it. The big the big question, we know they are making a fortune. The big question for AI is whether the trillions of dollars added to the Big six or the big five. If you exclude Nvidia, the big tech as opposed to big chip, there is the truly are the trillions of dollars of market cap justified by AI earnings. And the jury is going to be out on that for months if not years. And I, I

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can't see why is alphabet holding up. They have $175 billion worth of revenue from a 90% market share in search. And you might have noticed Microsoft launched a fabulous new browser yesterday Microsoft Edge with AI all over it. Google Google's market share is going to disappear. Uh, why? The share price is, uh, still retaining their trillions is my question. So Nvidia is a sentiment driver. It's not a question answer. I think we know they're spending money. The question is whether all the hopefuls are actually going to make money out of AI or not, or whether they're just going to substitute existing earnings. And we've cashed out of our big tech trade, which we've run for 18 months. We're in cash now hoping Nvidia isn't brilliant because we'll look stupid. Uh, but we're we're ready to look for another story now, uh, rather than, uh, big tech. The some of the big tech stocks are off a lot from the top. Uh, the top seems to be into me.