In this section we provide readers with three stocks that have attracted the interest of the broking community or the ‘herd’. Broker recommendations tend to be biased and highly optimistic. We try and breakdown these barriers and give our own honest opinion. It is important to keep in mind that technical analysis is only one part of the investment process and any recommendations do not give consideration to the underlying fundamentals of each business.
Woolworths (WOW) – Current Price $26.06 – Back in March the company delivered a solid Q3 with Australian Food sales up 5.1% to $9.3 billion with comparable sales growth of 4.5%. There has also been a significant ramp-up in Supermarket renewals run-rate with 49 planned for second half. New BIG W team and turnaround plan in place with tactical initiatives are underway. The business is expected to report a loss before interest and tax of $115m-135m for H2’17.
Broker View: Deutsche Bank (BUY $29.00) – The broker finds it interesting that 4 out of 8 members of the board have started buying stock over the last 3 weeks since the March Q update. They have almost doubled their holdings. It’s left the broker somewhat perplexed as to why the stock hasn’t rallied since its market beating sales report. As a result the broker is still positive on the stock and is confident it ticks all the right boxes.
Unconventional View: We agree with Deutsche. We’ve been fans of Woolies since June last year when the stock was trading around $21.00. WOW is the largest supermarket company in the country and holds a 35.7% stranglehold on the sector. Coles trails closely behind with a 33.2% stake. Over the last decade though, the entrance of aggressive competitors has caused WOW to up the ante. Both Aldi and Costco have stolen market share and have forced WOW to compete more aggressively on price. 2016 was a disastrous year for WOW. The company’s share price tumbled by 22% and it was forced to offload its doomed Masters JV, a $1.9bn write down announced, a new CEO installed, earnings guidance cut and poor 3Q sales numbers released. Anything that could have gone wrong, did. But once the large Masters write down was announced and new CEO Brad Banducci at installed was set for a stellar turnaround. The new CEO effectively cleared the decks and all the bad news was out. Banducci gave WOW new directive and vision. He gave Woolies a ‘fresh’ start. Pardon the pun. WOW put in place a strategy to emphasise that they “make eating & living well affordable & easy”. The turnaround strategy has proved successful and WOW is on the road to recovery. It recently delivered a solid Q3 sales result with Australian Food sales up 5.1% to $9.3 billion with comparable sales growth of 4.5%. There has also been a significant ramp-up in Supermarket renewals run-rate with 49 planned for second half. New BIG W team and turnaround plan in place with tactical initiatives are underway. The business is expected to report a loss before interest and tax of $115m-135m for H2’17. Woolworths is back and with a vengeance. A big transformation is at play and it’s about time. After investing more than $1 billion cutting grocery prices and delivering its strongest supermarket sales growth since 2010, the grocery chain is working hard to not only steal back market share lost to Coles and Aldi but to protect it from the entry of Amazon and Lidl. The recent sales update only highlights that how successful the turnaround strategy has been. WOW posted one of its strongest results thanks to higher supermarket sales. Sure significant discounting was helping drive sales growth and investing in prices, staff incentives and training costs money. Nevertheless its positive and a big improvement. There’s still a lot of work to do in the grocery space before it can take Amazon head on. The only laggard left is BIG W. FY losses are expected to blow out to $160 million. Something needs to be done and soon. On fundamentals WOW trades on a PE of 22.27x but this is more than justifiable with its rising ROE of 16.45%. Its EPS growth is 221% and yield is thin but OK. The company has a strong balance sheet supported by an extensive store network. Gearing stands at around 51%. Large cash flow with significant negative working capital. Cash flow comfortably finances capital expenditure. WOW is not without its risks. As with every supermarket player, the entire space has too many supermarkets and competition is hot. With the entry of Amazon, things will only get worse. It could lead to an all our price war and thinner margins. All in all – WOW is the dominant player in the supermarket and grocery world with first class management and experience. If it can continue to retain and expand its market share and rollout improved store formats which serve customers in a new and enticing way, it should be able to weather the Amazon effect and rival competition. We think investors should be loading up on Woolies and making it a core part of their portfolio. The stock has reversed and is in a short-term uptrend.
Aristocrat Leisure (ALL) – Current Price $21.35 – Has posted a solid set of HY results it also confirmed profit expectations for the full year to 30 September 2017. NPAT was $272.9m representing growth of 49% in reported terms and 53% in constant currency, compared to the $183.2m in the pcp. It reflected the strong performance delivered across the Group’s global portfolio, particularly growth in Aristocrat’s Americas, Digital and International Class III businesses, supported by sustained momentum in Australia. Dividend of 14c.
Broker View: Credit Suisse (NEUTRAL $23.50) – The broker agrees that the first half results were OK. It envisages solid growth in EPS out to FY20 but has kept its Neutral rating. Unconventional View: We disagree with Credit Suisse. We’re a lot more bullish on ALL. The company absolutely smashed profit expectations and reaffirmed guidance. You couldn’t ask for a better result. HY underlying NPAT was up 53% to $272.9m which beat expectations for a $253m profit. Revenue was up 24.6% to $1.2bn. The result was boosted by a robust performance from its US business which is winning market share thanks to its machines and gaming content. The company also reaffirmed FY guidance for earnings growth of 20%-30%. Macquarie thinks this guidance is actually conservative. The profit beat will trigger a series of broker upgrades. There are currently 5 Buys. The dividend also came in as expected. It wasn’t just the US that performed well, the company recorded strong performances in Malaysia, Philippines and South Africa, although some of these have been one off openings. We’re confident this strong momentum can continue in the second half especially with the US humming along. On the StockOmeter the company rates quite high at 86. That is a clear Buy indication. The stock is sitting on a high PE of 36x but its very high ROE is tipped to rise from 39% to 42%. On the chart the stock has your hockey stick formation and is in a solid uptrend since 2014. This recent upside break out has triggered a bullish buy indicator. The stock is making higher highs. We think investors should be buying on this trigger.
AP Eagers (APE) – Current Price $7.59 – Issued market guidance this week. Queensland state wide vehicle sales are off 5.9% January – April 2017, which is the 2nd worse performing state behind Western Australia, and national vehicle sales are off 2.8%. The industry expectations for the first 4 months of the year were for an equal or better market than last year’s. The whole industry has been caught out by an unexpected decline in private, business and government purchases off 3.6%, 2.0% and 8.1% respectively. Queensland operations represents 45% of the company’s trading result and as such has resulted in a decline in profit. These factors will result in a likely decline in 1H of between 7-9%.
Broker View: Morgan Stanley (UNDERWEIGHT $7.57) – The broker has a bearish view on the stock and believes headwinds in the short term will place pressure on earnings especially given the negative momentum in QLD. But the broker prefers APE to Automotive Holdings (AHG) because of its focus on automotive dealerships and no logistics. Despite this – outlook is negatve. Unconventional View: We agree with Morgan Stanley. The automotive space is going through a world of trouble. Aussie consumers are cutting back on spending on discretionary and luxury items as the economic cycle changes. It’s the threat of a downturn in the property market that’s causing it. When property is booming people go out and buy cars because of the wealth effect. With job uncertainty and flat wage increases, the first to get hit is the retail and automotive sectors. APE has a heavy exposure to QLD almost half its revenue comes from the state. The company owns 120 dealerships around the country and also holds a 23% stake in AHG – who also own a similar amount of dealerships. With tighter credit standards and weaker economic conditions, people are simply buying less cars. This profit downgrade only further highlights the tough conditions the company is undergoing. With guidance for NPAT to be down 9% from its previous half it’s not a good sign and it’s not just APE that has downgraded but AHG has also warned of weaker conditions to come. For that reason, we think this is the start of a sector wide downturn and we advise investors to stay away from automotive stocks. APE rates rather poorly on the StockOmeter – 39. Its ROE is dropping and it’s becoming less profitable. Debt to equity is high and its EPS is negative. Trend is also horrible. There’s no reason to be here.