In the first quarter, companies released both their 2022 earnings reports and their 2023 prospects. In general, publications met expectations and, in some cases, exceeded them. Overall, 2022 closed with better-than-anticipated results, confirming the capacity of the companies in which we invest to navigate an environment of inflationary pressure and restrictive monetary policy. Naturally, the results were not uniform among companies in different sectors and geographical regions, as we discuss below.
The majority of Spanish companies published results consistent with expectations. FY 2022 was slightly more complicated for companies whose cost base is linked to energy and commodity prices, but across the board they managed to offset the effects with sharp price hikes. It is worth noting the highly favourable results of Repsol, Inditex, Logista, and CIE Automotive. For its part, Repsol obtained record-high results with operating profit up +170% y-o-y, driven by oil and gas prices. On the downside, both CAF and Grifols posted weaker results with shrinking margins and lower-than-expected operating profit. After reviewing the estimates and assessing the results, we believe that EDM Inversión maintains a portfolio of the utmost quality with an ROE of 15% and annualised EPS growth for the next five years of 9.2%.
In Europe, meanwhile, the companies in the EDM Strategy fund posted very good results that largely surpassed consensus estimates. Issuing a more cautious message were 2023 guidances, which were affected by forecasts of sharp interest-rate hikes. Of note are the outstanding results of LVMH, Linde, Infineon, and CRH. The French luxury conglomerate reported strong sales growth owing to the re-opening of China and a stable operating margin of 26.6%, attributable to heavy investments in marketing, which increased 30% over the previous year. With regard to Linde, the German industrial gas company’s results exceeded expectations for the sixteenth consecutive time. A sharp rise in prices, coupled with the entry of new projects and efficiency improvements, were key to an excellent 2022, during which it was announced that shares would cease to be traded on the Frankfurt Stock Exchange and listed exclusively on the US stock market. In short, the results of most companies exceeded expectations and, consequently, we have revised our estimates upward. EDM Strategy has an ROE of 23% and expected profit growth for the next five years of 11.8%.
Across the Atlantic, the companies in our EDM American Growth fund saw mixed results. The Fed’s sharp rate hikes put future economic growth at risk and, subsequently, the capacity of the companies in which we invest to continue growing at +15-20%. With a portfolio heavily positioned in tech and discretionary spending, the focus came not from an ability to maintain margins but rather to maintain sales growth. Some companies, like Microsoft, Nvidia, and Visa, managed to maintain growth rates, confirming their strong market positions and competitive advantages. On the downside, more cyclical businesses, such as Match, Amazon, and Chipotle, reported lower-than-expected results and announced hefty job cuts. On an aggregate level, the EDM American Growth fund has an ROE of 22% and expected profit growth for the next five years of 19.1%.
In conclusion, on the whole 2022 results met and, in some cases, exceeded expectations. Some more conservative guidances struck a chord of uncertainty, though we expect these will be revised upward throughout 2023. In terms of valuation, company share prices are consistent with their historical multiples and, therefore, we expect profit to be in line with earnings growth. At EDM, we focus on analysing both financial and qualitative fundamentals to ensure the generation of long-term value. The 2022 results are simply a reflection of our choice to invest in quality assets capable of navigating any market situation.
To follow is a table reflecting the portfolio companies’ Q4 2022 results, which includes growth in organic sales, operating results, and EPS. In the last column, arrows indicate how the results compare to the projections of our team of analysts. Of the 41 companies analysed, 36 (88%) met or exceeded expectations, while only five (12%) failed to do so.
