Warren Buffett has a long track record of using stock market crashes to his advantage. After all, his strategy centres on seeking to buy high-quality companies when they trade at low prices. Often, such a situation occurs when a market downturn has recently taken place.

Since the next stock market decline could occur at any time, being prepared for the next one could be a sound move. By holding some cash, it is possible to be ready to capitalise on lower stock prices that may only be available temporarily.

The next stock market crash may not be far away

Predicting when the next stock market crash will occur is extremely difficult. After all, it can be prompted by a large number of factors that themselves are tough to estimate. For example, the 2020 market decline was caused by coronavirus, the course of which very few investors were able to predict even once it began to take place.

Therefore, being in a position of constant preparedness for the next bear market could be a sound move. History suggests that no stock market rise ever lasts in perpetuity. This means that an investor who waits for the next market downturn may be able to use it to buy cheap shares, as Warren Buffett has done previously.

Holding cash as per Warren Buffett

Warren Buffett holds significant sums of cash at all times. This provides him with the means to invest at short notice should opportunities arise. Furthermore, it means he is liquid, in terms of having access to funds that can quickly be invested, in case there is a sudden resurgence in share prices. This took place following the 2020 stock market crash, when many share prices experienced a rally after their short-term declines.

Of course, holding cash could mean lower returns than the stock market offers during a period of growth. Low interest rates mean that it is now difficult to obtain an inflation-beating return in some areas. However, this could be offset by the chance to be ready for the next market downturn, when low share prices may provide scope for long-term capital gains.

Investing in solid businesses

As well as holding cash in preparation for the next stock market crash, analysing current holdings to make sure they are financially sound could be a shrewd move. For example, ensuring they have solid balance sheets and competitive advantages in a changing world economy may lead to less risk and higher returns.

Furthermore, holding stocks that have wide margins of safety could be a logical approach over the long run. When combined with having cash on hand in case a market downturn suddenly takes place, this may lead to less risk and higher returns in what may prove to be a volatile stock market over the coming years.

More reading

• Goldman Sachs thinks you should buy the dip for these 2 ASX shares 
• Qantas (ASX:QAN) share price on watch after $1.1 billion loss
• Afterpay (ASX:APT) delivers more explosive growth and launches $1.25bn notes offering
• Iluka’s (ASX:ILU) record high profit results got lost in translation
• Fonterra (ASX:FSF) share price on watch after narrowing earnings guidance

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 

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For these 2 ASX shares, a reasonable interim result failed to translate into share price gains. After running the ruler for its results, Goldman Sachs thinks the market has got it wrong and reiterates its buy rating and higher target prices. 

2 ASX shares that dipped on earnings 

Jumbo Interactive Ltd (ASX: JIN) 

On Tuesday, Jumbo reported a 9% increase in revenue to $40.9 million while underlying NPAT growth was flat at $14 million. Net profit figures came in slightly above Goldman’s estimates of $13.7 million. Despite a fair result, the Jumbo share price slumped more than 7% on Tuesday and struggled to bounce higher on Wednesday. 

The broker’s view is that Jumbo’s result was broadly in line with expectations, while its medium-term story and long runway for growth remain intact. 

It estimates that the lottery retailing segment has had a promising start to the FY21 second half, noting COVID-19 tailwinds and improvements to the company’s technology.  

Jumbo also flagged strong growth prospects coming out of its newly established end-to-end lottery management offering. It highlighted a large total addressable market opportunity in Australia, estimated at $10.5 billion across the registered charities space. It has already signed up two partners to kick off the new division (Paralympics and St John Ambulance, forecast at around $6.5 million in combined annual total transaction volume).

Goldman believes Tuesday’s selloff likely resulted from a combination of confusion around capital management, an overreaction to market share moves in 1H21 and a broader ASX tech selloff. 

The broker reiterates its buy rating with a 12-month target price of $15.00. This represents an upside of 10.5% to today’s Jumbo share price.  

Hub24 Ltd (ASX: HUB) 

On Tuesday, the Hub24 share price fell 3% after the company announced its 1H21 results. 

Hub24 delivered a 38% increase in NPAT to $7.5 million while its fully-franked dividend came in at 4.5 cents per share, a 29% increase. Interestingly, these results were broadly below Goldman’s estimates, but the bulk of the NPAT variance can be explained by higher share-based payments to employees. 

Looking ahead, Hub24 reiterated that $10 million in annual cost synergies will be achieved by FY24 and noted that its Xplore Wealth Ltd (ASX: XPL) acquisition is scheduled to close shortly in March. 

The results also included an upgrade to its FY22 funds under advice guidance from $28-$32 billion to $43-$49 billion. Behind the upgrade, Hub24 noted a very strong institutional pipeline, plus potential upside from its platform agreements with IOOF Holdings Limited (ASX: IFL) and Clearview Wealth Ltd (ASX: CVW). 

After running the numbers, Goldman downgraded its FY21 underlying NPAT by 8.1% due to the slight earnings before interest, taxes, depreciation and amortisation (EBITDA) miss and higher share-based payments. The broker still maintained a buy rating and reiterated its 12-month price target of $26.58, or an upside of 15% at the time of writing. 

More reading

• What’s with the HUB24 (ASX:HUB) share price today?
• Here’s why the Jumbo Interactive (ASX:JIN) share price is pushing higher
• Jumbo (ASX:JIN) share price slides despite positive update
• Why the Hub24 (ASX:HUB) share price will be on watch today
• What’s with the Hub24 (ASX:HUB) share price today?

Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Hub24 Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Jumbo Interactive Limited. The Motley Fool Australia owns shares of and has recommended Jumbo Interactive Limited. The Motley Fool Australia has recommended Hub24 Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Qantas Airways Limited (ASX: QAN) revealed Thursday it copped a statutory loss after tax of $1.1 billion and took a 75% hit in revenue for a COVID-ravaged half-year ending 31 December.

All eyes will be on the Qantas share price after it raked in just $2.33 billion of revenue, compared to $9.46 billion one year earlier. 

However, the airline touted its underlying earnings before interest, taxes, depreciation and amortisation (EBITDA) of $86 million as evidence of its “fundamental resilience”.

“These figures are stark but surprising,” said group chief executive Alan Joyce.

“During the half we saw the second wave in Victoria and the strictest domestic travel restrictions since the pandemic began. Virtually all of our international flying and 70% of domestic flying stopped.”

Qantas’ money makers and loss makers

On the bright side, the domestic business generated positive cashflow despite a 70% decline in revenue and capacity. Qantas’ market share increased to about 70% after more than 20 “large” corporate accounts were added.

The loyalty points and cargo businesses still kept the money coming in for the company while passenger flights were grounded.

“The [loyalty] program has evolved to the stage where the vast majority of points are earned from activity on the ground. Qantas Freight had a record result and has been a natural hedge to the lack of international passenger flying, which has created a shortage of cargo space globally,” said Joyce.

“These factors couldn’t overcome the massive impact of this crisis, but they have softened it.”

The international business, understandably, suffered an underlying EBITDA loss of $86 million.

While its planes were grounded, the company took the chance to shed 8,500 employees, saving about $600 million for the current financial year. The restructure will eventually realise $1 billion in annual savings from 2023.

Will the Qantas share price reflect future recovery?

Recent state border closures have delayed Qantas’ recovery by 3 months, the airline estimated.

The carrier is now working with an assumption that international travel would resume at the end of October, while flights to New Zealand might pick up in July.

“The COVID vaccine rollout in Australia will take time, but the fact it’s underway gives us more certainty,” said Joyce.

“More certainty that domestic borders can stay open because frontline and quarantine workers will be vaccinated in a matter of weeks. And more certainty that international borders can open when the nationwide rollout is effectively complete by the end of October.”

Domestic capacity will hit 60% of pre-COVID levels during the current quarter, while international remains at just 8% currently.

The airline will attempt to keep cash flow positive for the financial year. Net debt will peak in the current half-year while balance sheet repair will start from next quarter.

The Qantas share price fell 0.4% on Wednesday, to trade at $5.01. The stock had been as low as $2.03 in the past 12 months.

More reading

• Why did Qantas (ASX:QAN) shares soar 4% on Tuesday?
• Can ASX travel shares stage a comeback?
• Share prices of travel shares soar, Corporate Travel (ASX:CTD) and Webjet (ASX:WEB) report
• Why ASX travel shares were smashed on Friday
• ASX 200 Weekly Wrap: ASX cools on earnings reality check

Motley Fool contributor Tony Yoo owns shares of Qantas Airways Limited. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Afterpay Ltd (ASX: APT) share price won’t be going anywhere today after it requested a trading halt.

The payments giant made the request following the release of its half year results and the announcement of a capital raising.

How did Afterpay perform in the first half?

Afterpay continued its impressive form during the first half and delivered strong growth across all key metrics.

For the six months ended 31 December, the company reported a 106% increase in underlying sales to $9.8 billion. On a constant currency basis, Afterpay’s underlying sales were up 112% to $10.1 billion.

This led to total income growth of 108% to $374.2 million for the half. Once again, excluding currency headwinds, Afterpay’s income would have been up 114% to $385.2 million.

Thanks to a stable net transaction loss (NTL) margin of 0.5%, Afterpay’s net transaction margin came in 110% higher at $213.9 million.

In respect to earnings, the company reported a massive 521% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to $47.9 million.

And on the bottom line, Afterpay didn’t post a maiden half year profit as many were expecting. It recorded a loss after tax of $79.2 million. This was primarily driven by the net loss on financial liabilities at fair value of $64.8 million relating to its Clearpay business.

What were the drivers of its growth?

Key drivers of Afterpay’s growth during the first half were its customer numbers and repeat use.

At the end of the period, active customers reached 13.1 million. This was up 80% on the prior corresponding period. North American active customers now exceed 8 million and are up 127% since this time last year.

In respect to repeat use, management revealed that the Afterpay platform continues to enjoy sector-leading customer transaction frequency and retention. It notes that over 91% of underlying sales came from repeat customers.

Global expansion

The company advised that its acquisition of Pagantis in Spain is expected to complete in the middle of March, pending regulatory approval being granted by the Bank of Spain.

Preparations for a launch into Spain, France, and Italy are currently underway with a pipeline of over $1 billion global merchants in the process of contracting.

Work on the required infrastructure, processes, and systems is well progressed. As are its plans to integrate the Pagantis team into the existing Afterpay organisation.

In addition, the company is continuing to focus on progressing its early stage investment into Asia. It has established a base in Singapore following the acquisition of EmpatKali in August. From here, it intends to drive the strategic development of its potential expansion into South East Asia.

Afterpay Money

Last year Afterpay announced a partnership with Westpac Banking Corp (ASX: WBC) to launch savings and transaction accounts.

This will see the launch of a standalone Afterpay Money app in the first quarter of FY 2022. This app is being designed to help Australians manage their money.

The company notes that Afterpay Money app customers will be able to make it their primary money management app, complete with linked debit card. It is intended that new cards will be able to be added into the digital wallet for payments, a salary will be able to be paid into the account directly, money will be able to be transferred to other financial accounts, and up to 15 savings goals can be created.

Capital raising

Afterpay has announced a $1.25 billion convertible notes offering this morning. The company is undertaking the offering in order to increase its ownership of Afterpay US business.

It advised: “Afterpay has entered into an agreement with Matrix pursuant to which Matrix will waive 35% of the underlying interest it holds in Afterpay US, Inc. under the Matrix Convertible Notes for approximately A$373 million in cash (Matrix Transaction). The final price will be determined by reference to the reference share price of the Convertible Notes Offering.”

Management notes that the acquisition price will be accretive to Afterpay shareholders across GMV, revenue, and customer multiples. The company will own 93% of the business following the transaction.

Outlook

Surprisingly, no update was given on its performance since the end of the first half. This could potentially weigh on the Afterpay share price when it returns to trade.

More reading

• 5 things to watch on the ASX 200 on Thursday
• Why you should think long-term when investing
• The IOUpay (ASX:IOU) share price is skyrocketing 30% today
• What’s happening with ASX 200 tech shares today?
• ASX 200 goes higher, Afterpay sinks, Adbri impresses

Motley Fool contributor James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Don’t be fooled by the profit surge in Iluka Resources Limited’s (ASX: ILU) results this morning that sent its bottom line to record highs.

The mineral sands miner posted a net profit of $2.41 billion for the 2020 financial year ended 31 December. This compared to a loss of $300 million in the year before.

But the dramatic swing to profit was largely due to gains from its spin-off of Deterra Royalties Ltd (ASX: DRR).

Iluka’s big profit result boost from Deterra spin-off

That transaction added $2.25 billion to Iluka’s net profit for the year, while the performance at its remaining mineral sands business declined.

Mineral sands revenue fell 20.6% to $947 million while earnings before interest, tax, depreciation and amortisation (EBITDA) tumbled 35.6% to $342 million.

The weaker numbers won’t come as a big surprise though. The COVID-19 pandemic hurt zircon sales volumes early in 2020 as ceramic plants (which use zircon) were forced to shut or work at reduced capacity.

No day at the beach for mineral sands in 2020

The price of zircon fell in the March quarter as the crisis unfolded but managed to stabilise thereafter.

Meanwhile, Iluka’s synthetic rutile sales volumes were down largely due to the contractual dispute with major customer Chemours.

Few bright spots in Iluka’s profit results

Rutile prices were the only bright spot as the price for the commodity increased due to supply tightness.

Another silver lining was that management managed to achieve an EBITDA margin of 36%. While that’s down from the 45% level it reported in 2019, that’s still a respectable margin given its operating leverage.

A drop in revenue will almost always have a much larger impact on a miner’s bottom line and margin due to the high fixed cost nature of the industry.

Brighter outlook in 2021

There are signs that Iluka’s mineral sands revenue could improve in 2021. The miner told its customers it is increasing zircon prices to US$70 a tonne from April.

The price increase comes as Iluka noted signs of recovery in market conditions for zircon and high-grade titanium dioxide feedstocks.

While the contract dispute with Chemours hangs over the group, management believes it will be able to sell at least 295,000 tonnes of rutile and synthetic rutile this year.

This is because of the take-or-pay contracts it has with a range of customers. These contracts commit customers to buy a mandated minimum amount of the commodities from Iluka.

The miner’s 2021 production forecast is for 285,000 tonnes of zircon, 200,000 tonnes of rutile and between 115,000 and 175,000 tonnes of synthetic rutile.

More reading

• These 2 ASX stocks jumped after a broker upgrade to “buy” today
• Top brokers name 3 ASX shares to sell today
• Why Beach, Fortescue, Iluka, & Temple & Webster shares are dropping lower

Motley Fool contributor Brendon Lau owns shares of Deterra Royalties Limited and Iluka Resources Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Fonterra Shareholders’ Fund (ASX: FSF) will be one to watch today as New Zealand dairy company narrowed its forecasted earnings guidance.

The fund declared it would raise the bottom range of its previously forecast earnings per share – from 20–35 cents per share up to 25–35 cents per share.

Words from the CEO

Fonterra CEO Miles Hurrell stated the move would provide more clarity on its full-year earnings guidance. The fund’s interim accounts are due for release on 17 March.

“That is why we have come out today with a narrower forecast earnings range of 25-35 cents per share, which still reflects the usual uncertainties we face over the course of any given year.”

Hurrell added: “Despite the challenges and flow on effects of COVID-19, the team have remained committed and disciplined. There has been strong demand for the Co-op’s New Zealand milk, and we’ve continued to get product to the market.”

Fonterra’s unique market situation

Fonterra was created out of the deregulation of the New Zealand dairy industry. The liberalisation process started when the New Zealand government stopped setting the price of dairy products in 1976. It concluded when dairy companies were allowed to set their own prices in 1993.

The fund is not just the largest dairy producer in all of New Zealand, by far, but the largest company in the Kiwi nation. It is a co-op owned by 11,000 dairy farmers.

30% of the entire world’s dairy exports are produced by Fonterra. Brands familiar to Australians include Western Star, Mainland, and Perfect Italiano.

Because of the Co-op’s extreme market power, it sets the price for dairy. With oversight from the New Zealand Commerce Commission, Fonterra declares the price it will pay dairy farmers for their products. Their last announcement lifted the farmgate price to NZ$6.70-7.30 per kilogram of milk solids.

The farmgate price is calculated by recording global prices for dairy commodities, such as skim milk powder and buttermilk powder, then deducting the costs of productions. The end result is price paid to farmers that is the highest possible, but which still leaves the dairy behemoth with adequate returns.

Fonterra uses export prices in this calculation as it sells 95% of its product overseas.

Many believe the high price New Zealanders pay for dairy products is a result of this system.

Fonterra’s share price outlook

While flat yesterday (opening and closing at $4.63), the Fonterra share price has been on an upward trajectory for the last year.

One year ago, Fonterra shares were selling at $3.74 – an incredible 24% rise compared to the All Ordinaries (ASX: XAO), which gained just 1.3% over the same period.

More reading

• Fonterra (ASX:FSF) share price in focus after boost to forecast milk prices

Motley Fool contributor Marc Sidarous has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Gentrack Group Ltd (ASX: GTK) shares will be on watch this morning following an update regarding the company’s FY21 outlook. At market close yesterday, the Gentrack share price finished the day 1.7% lower at $1.375.

Let’s take a look and see what the software company announced.

How are things looking for Gentrack in FY21?

The Gentrack share price could be on the move today after the company reported a positive near-term future ahead.

During its annual general meeting (AGM) in November last year, the company advised that its performance for FY21 would likely be down. It said that earnings before interest, tax, depreciation and amortisation (EBITDA) for FY21 would fall well below H2 FY20, and profit could be break-even.

However, according to this morning’s release, Gentrack revealed that its FY21 revenues are expected to be in line with or slightly ahead of FY20’s revenues. The company achieved total group revenue of NZ$100.5 million for the full year’s end in 2020.

In addition, EBITDA is forecast to be roughly NZ$5 million. This is provided that research and development (R&D) costs are expensed. Gentrack noted that incremental R&D costs are projected to be around NZ$3 million per quarter from Q3 FY21 moving forward.

The company anticipates it will continue to be net cash flow positive for FY21 due to working capital management. This will build upon the NZ$16.8 million of net cash that was reported at 30 September 2020.

Profit and cash flow are predicted to be primarily based on the performance of H1 FY21. This is because the company’s incremental R&D spend is planned for the second half of 2021.

Gentrack share price snapshot

Over the last 12 months, the Gentrack share price has sunk more than 30%, reflecting difficult trading conditions. Gentrack shares took a dive last year in March, hitting a multi-year low of 77 cents. Since partially recovering, its shares have been moving sideways at around the $1.40 mark.

Based on the current Gentrack share price, the company commands a market capitalisation of around $135 million.

More reading

• Where next for the Sydney Airport (ASX:SYD) share price?
• Is the Woolworths (ASX:WOW) share price in the buy zone after its results?
• a2 Milk (ASX:A2M) share price on watch after downgrading guidance again
• 2 highly-rated ASX growth shares to buy
• 2 outstanding ASX dividend shares to buy today

Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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It has certainly been a tough 12 months for the Sydney Airport Holdings Pty Ltd (ASX: SYD) share price.

With travel markets impacted greatly by the pandemic, the airport operator’s shares have fallen heavily.

Since this time last year, the Sydney Airport share price has lost approximately 25% of its value.

Is this a buying opportunity?

One broker that believes this is a buying opportunity for investors is Goldman Sachs.

In response to its full year results release this week, the broker has reaffirmed its buy rating and $6.73 price target.

Based on the current Sydney Airport share price, this price target implies potential upside of approximately 11% over the next 12 months.

And with Goldman predicting that the company could start paying dividends again in FY 2021, the total return on offer with its shares is over 12% according to the broker.

Why is the Sydney Airport share price good value?

Goldman is a fan of the airport operator due to its monopoly in Sydney and its position as the main gateway in Australia.

The broker explained: “We remain Buy-rated on Sydney Airport with a 12-month target price of A$6.73 presenting c.11% upside at current levels (vs. 2% average for our coverage). SYD is an unregulated monopoly asset and the primary aviation gateway to Australia, a structural position that is not going to change following the Covid-19 pandemic.”

In addition, its analysts have been impressed with the way the company has gone into hibernation during the pandemic.

Goldman commented: “Management’s swift and astute management of key operating and capital costs during the course of the pandemic has effectively put the airport into hibernation, whilst limiting structural impediment to its financial recovery as/when passenger volumes resume. […] On the analyst briefing, the company indicated that had operated at a cash burn rate of c.A$5-10mn/mth during the final months of CY20, during which time passenger movements, both domestic and international, were severely disrupted.”

So with Sydney Airport having liquidity of $3.5 billion ($1.1 billion in cash and $2.4 billion in undrawn debt facilities), it is very well-positioned to ride out this storm.

Dividends to resume soon

Looking ahead, the broker is confident that its dividends will resume once trading conditions return to normal.

“We expect SYD to be major beneficiary of the domestic inoculation strategy, as the program limits the spread of the virus and likelihood of state-border closures. While SYD provided no guidance or outlook, with the balance sheet well-supported post last year’s equity raising, we can be comfortable that as soon as profitability and cashflows return, dividends too are likely to resume.”

In fact, based on the latest Sydney Airport share price, Goldman estimates that it offers investors dividend yields of 4.5% and 5.2%, respectively, in FY 2022 and FY 2023.

More reading

• Sydney Airport (ASX:SYD) share price receives a boost on full-year results
• ASX 200 Weekly Wrap: ASX lower despite bumper dividends
• ASX 200 Weekly Wrap: ASX cools on earnings reality check
• ASX 200 Weekly Wrap: RBA unleashes ASX’s inner animal
• Leading brokers name 3 ASX shares to sell today

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Woolworths Group Ltd (ASX: WOW) share price was a positive performer on Wednesday following the release of its half year results.

The retail conglomerate’s shares overcame the market weakness and rose 1% to $39.50.

This leaves the Woolworths share price trading within sight of its record high of $42.97.

How did Woolworths perform?

For the six months ended 31 December, Woolworths reported a 10.5% increase in revenue to $35.8 billion and a 15.9% increase in net profit after tax to $1,135 million.

This was driven by strong sales growth across all businesses, with the exception of its COVID-impacted Hotels.

Management notes that Australian Food, BIG W, and Endeavour Drinks all reported sales growth well above trend.

Can the Woolworth share price go higher?

According to a note out of Goldman Sachs, its analysts believe the Woolworths share price is close to peaking.

This morning the broker reaffirmed its neutral rating but lifted its price target to $41.40.

Based on the current Woolworths share price and Goldman’s dividend forecast, this price target implies a potential total return of 7.7% over the next 12 months.

What did Goldman say?

Goldman was pleased with its half year results. It said:

“Woolworths reported 1H21 revenues of A$35.9bn, +10.6%, EBIT increased 10.5% to A$2092mn (+7.1% vs. GSe), implying an EBIT margin of 5.8% (flat on pcp). The larger divisions of Aus and NZ Food and Endeavour Drinks performed in line; however, Hotels and Big W significantly outperformed.”

“The recovery in Hotel EBIT precedes the timing of the Endeavour Group separation, which WOW now expects to take place by mid-year with documents to be released in 4QFY21. We see this as an important potential catalyst, given a separation would help facilitate a capital management event for the core supermarket operations.”

Looking ahead, Goldman Sachs has upgraded its earnings and dividend forecasts. It explained:

“We have upgraded FY21E EBIT by 7.6% to A$3.67bn, reflecting the stronger than expected earnings conditions for Hotels and Big W. We raised FY22E EBIT 3.0% to A$3.84bn. Lower interest expense has increased our upgrade at the NPAT level to 12.7% in FY21E and 6.2% in FY22E. Dividend forecast has been increased to A$1.13 for FY21E and A$1.20 for FY22E.”

And while this has supported an increase in its price target to $41.40, there isn’t enough upside in the Woolworths share price to warrant a change of rating.

Goldman appears to prefer Coles Group Ltd (ASX: COL) at current levels. The broker has a buy rating and $20.70 price target on its shares.

More reading

• Woolworths (ASX:WOW) to move forward with Endeavour demerger
• Maggie Beer (ASX:MBH) share price surges on 20% sales growth
• ASX 200 down 0.45%: Woolworths rises, Blackmores jumps, Appen sinks
• Woolworths (ASX:WOW) share price rising on earnings boost
• 5 things to watch on the ASX 200 on Wednesday

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The A2 Milk Company Ltd (ASX: A2M) share price will be one to watch on Thursday.

This follows the release of the fresh milk and infant formula company’s half year results this morning.

How did a2 Milk perform in the first half?

The good news for shareholders and the a2 Milk share price is that the company delivered a result in line with its downgraded guidance.

For the six months ended 31 December, the company reported a 16% decline in revenue to NZ$677.4 million. This compares to its guidance of ~NZ$670 million for the half.

In respect to earnings, a2 Milk posted a 32.2% decline in earnings before interest, tax, depreciation and amortisation (EBITDA) to NZ$178.5 million.

While this means that its EBITDA margin came in below its guidance of ~27%, this was due to Mataura Valley Milk acquisition costs. Excluding these costs, a2 Milk’s EBITDA margin would have been in line at 27%.

And on the bottom line, the company’s net profit after tax fell 35% over the prior corresponding period to NZ$120 million.

Finally, a2 Milk reported a NZ$9.2 million operating cash outflow for the period. This was due to an increase in inventory and a decrease in accounts payable. Nevertheless, the company finished the period with a massive NZ$774.6 million cash balance and no debt.

Why did sales and earnings decline?

There have been a number of factors weighing on the company’s performance and ultimately the a2 Milk share price.

The main one is of course weakness in the daigou and cross-border e-commerce (CBEC) channels. They have been significantly impacted due to disruption resulting primarily from COVID-19 related issues.

And although the company’s China label infant nutrition products grew sales by 45.2% to NZ$213.1 million and its Australian and US liquid milk businesses continue to growth, it wasn’t enough to offset this.

Also weighing on its performance was weaker gross margins. This was primarily due to recognising a stock provision of NZ$23.3 million, higher cost of goods sold for China label infant nutrition, pricing pressures, and an adverse product mix shift. The latter has seen a higher proportion of liquid milk to infant nutrition sales.

Guidance downgraded again

Although a2 Milk delivered a first half result in line with its guidance, it looks likely to fall short of its full year guidance. This could be bad news for the a2 Milk share price on Thursday.

Management commented:

“The pace of recovery in the daigou/reseller channel and in the CBEC channel has been slower than previously anticipated and the Company now expects revenue to be at the lower end of the previous guidance range.”

“A lower EBITDA margin range is now expected due to lower revenue, higher brand investment, longer daigou/reseller support, movements in foreign currency and adverse channel mix relative to what was anticipated in December.”

In light of this, it is forecasting FY 2021 revenue of ~NZ$1.4 billion. This compares to its previous guidance range of NZ$1.4 billion to NZ$1.55 billion.

As for its earnings, management now expects an EBITDA margin of 24% to 26% (excluding MVM acquisition costs). This compares to its previously downgraded guidance for an EBITDA margin of 26% to 29%.

It is also worth noting that this guidance assumes that actions it is taking to re-activate the daigou/reseller channel deliver a significant improvement in quarter-on-quarter growth in the fourth quarter.

The a2 Milk share price is down 31% over the last 12 months.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post a2 Milk (ASX:A2M) share price on watch after downgrading guidance again appeared first on The Motley Fool Australia.

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