We’ve reached the midway point of the February reporting season, with around a third of ASX 200 companies reporting this week alone.

View the Morningstar earnings calendar here to see when companies are scheduled to release their earnings.

As expected, it’s been a bit of a mixed bag. Banks are profiting from higher interest rates, although the outlook for margins are less optimistic - particularly as competition intensifies for the tens of thousands of fixed-rate customers preparing to refinance this year.

And while consumers are still spending, retail earnings show early signs of a slowdown as rising interest rates hit household budgets.

Yet many property owners are prepared to ride out the storm rather than sell their home at a discount – at least for the time being – with listing volumes and profit down at both REA Group (ASX:REA) and Domain (ASX:DHG).

So what does this mean for investors?  

The long road to investing


As Morningstar’s head of Australasia equity research Peter Warnes says, investing is somewhat like a road trip – it’s what’s ahead that is most important.

“The current reporting season is the snapshot from the rearview mirror—what happened in the period ending 31 December 2022,” he says.

“Investors should be focused on what lies ahead and just like the roads we recently travelled, there are many potholes.”

Those potholes – caused by rapidly rising inflation and a belated and aggressive central bank response – are yet to be repaired.

“Corporate profitability will track the expected contraction in economic activity for the remainder of 2023 and likely into 2024,” Warnes says.

But as outlined in my earnings season preview article, buying opportunities can arise from disappointing earnings results. Heeding the advice of Morningstar’s director of equity research Mathew Hodge, I compiled my own wish list of high-quality companies I’d like to buy if the price was right. Even better if they have a wide moat.

For investors with their stock shopping list at the ready, let’s see if any buying opportunities among the ASX big hitters or sectors of interest have arisen so far. 

As a reminder, 4-star and 5-star ratings signal a stock is undervalued, while a 3-star rating is considered fairly valued, and 1-star and 2-star stocks are considered overvalued. Morningstar's full coverage of company earnings is available to Investor subscribers.

CSL (ASX: CSL)


Shares in Australian biotech CSL jumped back above $300 earlier this month, with the company on Tuesday reporting a 25% increase in first half revenue due to strong blood plasma collections. A positive sign after nearly three years of Covid disruptions.

Morningstar healthcare analyst Shane Ponraj says plasma collections are now 10% above pre-pandemic levels.

“This is due to Mexican nationals once again being allowed to donate plasma in the US on visitor visas, as well as targeted marketing and digital initiatives from CSL to attract donors,” Ponraj says.

“We still expect CSL’s plasma constraints to further ease in the near term, and with diagnosis rates improving on increased social mobility, we remain optimistic on the long-term trajectory of immunoglobulins demand which is underpinned by chronic indications.”

Shares jumped as much as 7% on the result, before pulling back to end the week 1.6% lower. As of Friday, CSL was trading at a range considered fairly valued.  

  • Star rating: ★★★
  • Fair Value: $315.00
  • Economic moat: Narrow

The big four banks


Rising interest rates have helped boost net interest margins – which measure how much a lender receives in loan interest, minus how much interest it pays to savers.

It comes as the ACCC launched an enquiry into bank savings rates, amid concerns lenders are passing on higher interest rates to home borrowers, and not savers.

All four major banks have released quarterly or first-half profits, but only two are trading at a discount.   

Commonwealth Bank (ASX:CBA)


On Wednesday, CBA reported a strong first half cash profit of $5.2 billion, up 9% compared to a year ago.

The result was underpinned by lending growth and a rise in net interest margins. But CBA shares fell sharply on warnings margins had already peaked in October, as headwinds from rising funding costs and competition for new loans start to outstrip the benefits of higher interest rates on net interest margins.

Morningstar banking analyst Nathan Zaia says CBA remains overvalued.

“Commonwealth Bank trades at a material premium to our unchanged $87 fair value estimate. We think the tailwind of a higher cash rate environment is more than priced in,” Zaia says.

“The bank plans an $1 billion an on-market buyback, but at less than 1% of the shares on issue, it’s immaterial to our fair value estimate.”

  • Star rating: ★★
  • Fair Value: $87.00
  • Economic moat: Wide

Westpac (ASX:WBC)


Westpac remains on Morningstar’s global best stock ideas list, with the bank trading at a 22% discount to its $29.00 valuation.

Westpac’s first quarter update, released Friday, shows nothing that changes that view, Zaia says.  

“Being an update on capital, credit quality, and funding, Westpac gives no detail on margins or profits. But we expect the bank is benefiting from similar margin tailwinds to peers,” he says.

  • Star rating: ★★★★
  • Fair Value: $29.00
  • Economic moat: Wide

National Australia Bank (ASX:NAB)


Zaia says NAB’s first quarter cash profit of $2.2 billion is a ‘strong start to the year’, and the result of higher net interest margins.

“That said, NIM is only up 7 basis points from the fourth quarter of fiscal 2022, likely owing to strong mortgage competition, rising customer deposit pricing, and customer switching out of transaction accounts,” Zaia says.

“Our fair value estimate increases 3.5% to $30 per share on slightly more positive loan growth and cost assumptions, with shares fairly valued.”

  • Star rating: ★★★
  • Fair Value: $30.00
  • Economic moat: Wide

ANZ (ASX:ANZ)


Shares in ANZ are sitting at a 20% discount to Morningstar’s valuation of $31.00 per share.  

The bank released its first-quarter trading update last week but made no mention of net interest margins.

“In a higher rate environment, the spread between lending rates and customer deposits is expected to be beneficial to bank margins,” Zaia says.

“We make no changes to our earnings forecasts or $31 per share fair value estimate and believe ANZ Group is undervalued.

  • Star rating: ★★★★
  • Fair Value: $31.00
  • Economic moat: Wide

Retail


Some of Australia's largest retailers are reporting the start of a pullback in consumer spending, as shoppers focus on value.

Wesfarmers (ASX: WES)


Retail conglomerate Wesfarmers (WES) this week reported a 14.1% increase in first-half net profit to $1.38 billion, with revenue up 27% to $22.6 billion.

Wesfarmers managing director Rob Scott says its value-oriented retailers like Bunnings, Kmart and Target are well positioned to meet changing demand as customers adjust to cost-of-living pressures.

However, Morningstar director of equity research Johannes Faul says Wesfarmers shares are currently overvalued. 

"We anticipate the rising cost of living due to higher mortgage rates and consumer price inflation to force households to lower their spending on non-essential items," Faul says.

"Within Wesfarmers’ suite of businesses, we expect its department stores to be hit most."

Wesfarmers is trading at a 22% premium to Morningstar’s fair value estimate.

  • Star rating: ★★
  • Fair Value: $42.00
  • Economic moat: Wide

Read more about increasing investor appetite for investing in a Bunnings Warehouse.

JB Hi-Fi (ASX:JBH)


The consumer electronics and home appliance retailer says sales have slowed since the start of 2023 with customers becoming more cautious as the economy enters an uncertain period.

JB Hi-Fi reported record sales - up 8.6% to $5.3 billion - and earnings for the first half of 2022/23 on the back of elevated customer demand and strong Black Friday and Boxing Day promotions.

But sales grew by just 2.5% at its 199 JB Hi-Fi Australian stores in January and were flat at its 106 The Good Guys stores.

Faul expects sales momentum to ‘progressively worsen’ over the second half of fiscal 2023.

“Our fiscal 2023 revenue forecast of $9.3 billion implies a 9% decline in sales growth in the second half compared with the prior comparable period,” he says.

  • Star rating: ★★
  • Fair Value: $35.50
  • Economic moat: None

Miners


Iron ore heavyweights BHP and Rio Tinto report earnings in the coming days,  but there were two names that stood out this week.

Newcrest (ASX: NCM)


Takeover target Newcrest delivered a solid first-half result on Thursday as the company rejected a takeover proposal from US mining giant Newmont.

Newmont launched a takeover bid for the Australian gold miner earlier this month, however Morningstar mining analyst Jon Mills says the offer was ‘opportunistic’ and undervalued the company.

“We retain our fair value estimate for no-moat Newcrest of $31 and agree with its decision to reject the increased indicative offer from competitor Newmont,” Mills says.

“However, Newcrest has offered to give Newmont limited, nonexclusive due diligence to encourage Newmont to make an even higher offer.

“Newcrest shares trade at a 24% discount to fair value and we continue to think the offer is opportunistic.”

Mills says gold production is expected to increase in the coming years, and Newcrest also has a valuable development pipeline.

  • Star rating: ★★★★
  • Fair Value: $31.00
  • Economic moat: None

Whitehaven Coal (ASX: WHC)


Soaring coal prices drove Whitehaven’s record first-half result, and the miner remains undervalued, Mills says.

Whitehaven reported a net profit after tax of $1.8 billion, dwarfing the $340 million reported a year ago.

Mills says Whitehaven is ‘drowning in cash’ following the bumper result, although slashed the miner’s fair value estimate to $10.00 on expectations of lower coal prices.

“The average coal price of AUD 552 per metric ton, nearly triple the average of AUD 202 a year ago, dictated the buoyant result with coal sales volumes nearly flat,” Mills says.

“While the result itself was strong, we lower our fair value estimate for no-moat Whitehaven to $10 per share, from $12.

“The cut reflects the sharp decline in the thermal coal price to around USD 220 per metric ton versus a January 2023 average of close to USD 400. We now assume the thermal coal price averages USD 190 per metric ton between 2023 and 2025, down from USD 270 previously given the lower futures curve.”

He says there’s reasons to remain optimistic, given impending sanctions against Russian coal and ongoing challenges to new supply.

  • Star rating: ★★★★
  • Fair Value: $10.00
  • Economic moat: None

Real estate


Rising interest rates have pulled the handbrake on property price growth – but also property listings – according to real estate advertising portals REA Group and Domain.

We asked Morningstar equity analyst Roy van Keulen whether either are a buying opportunity at current levels.

REA Group


To put it simply, wide-moat REA Group’s shares screen as overvalued, van Keulen says.

The company reported a 9% decline in first half net profit, and revenue growth of 5%.  

“REA Group’s Australian residential segment, which comprises the vast majority of earnings, is facing challenges as listings normalise and we expect these challenges to intensify in the second half of fiscal 2023,” he says.

“Although REA Group reported 5% year-on-year revenue growth in its residential segment during the first half of fiscal 2023, this was skewed by the first quarter during which buy listings grew 5% year on year.

“During the second quarter, however, new buy listings declined sharply to negative 21% year on year, corresponding closely to our estimated required decline in listings to revert to trend.”

  • Star rating: ★★
  • Fair Value: $100
  • Economic moat: Wide

Domain


As the number-two listings platform behind REA Group, narrow-moat Domain’s first-half result was also weighed down by lower listing volumes.

“Domain reported [earnings per share] of $2.24, which was down by a third compared with the previous corresponding period,” van Keulen says.

“However, free cash flow to the firm from operating activities was cut in half when accounting for a near doubling of capital expenditures on property, plant, and equipment.”

“The result supports our assessment that Domain has a structurally weaker and more cyclical network than wide-moat REA Group.”

Domain is trading at a 38% premium to Morningstar’s $2.30 valuation.

  • Star rating: ★★
  • Fair Value: $2.30
  • Economic moat: Narrow