Key points
- ANZ/Roy Morgan survey of consumer confidence is running at almost seven-month highs.
- JB Hi-Fi, Super Retail Group and Dick Smith are all trading at 12-17% below consensus forecasts.
- After a horrible year, even The Reject Shop is showing some upside potential.
One of the most important numbers, with major implications for revenue, profit and dividends for domestically-focused companies, measures the “confidence” of Australian consumers.
Given that Australian consumer spending represents more than two-thirds of the nation’s Gross Domestic Product (GDP), that feeling of confidence is important to the nation’s economy – and, of course, the stock market. Particularly with the all-important Christmas season coming up for the nation’s retailers.
There are two ways to monitor consumer sentiment. There’s the long running Westpac–Melbourne Institute Index of Consumer Sentiment, which is monthly. The last reading for October 2014, although below 100 for the eighth straight month – indicating more pessimists than optimists – ticked up slightly.
The second is the ANZ/Roy Morgan survey of consumer confidence, which is weekly. It shows a much healthier outlook for consumer confidence, running at almost seven-month highs.
Last week, we saw the signs of improved consumer sentiment start to flow into retail sales. Retail sales rose by 1.2% in September, according to the Australian Bureau of Statistics (ABS), to be up 5.7% on a year ago.
Most importantly, says Savanth Sebastian, economist at CommSec, non-food retailing rose by 1.8% in September – the strongest result in five-and-a-half years – to be up 4.8% on a year ago. Sales by chain-store retailers and other large retailers rose by 1.6% in September – the best gains in 11 months.
“The strength in consumer confidence certainly seems to be translating through to a pick-up in activity and the latest results should support retailers in the lead-up to Christmas,” says Sebastian.
That would be music to the ears – and tills – of the stockmarket’s discretionary retailers, who have done it tough this year. But analysts mostly see some healthy upside in the share prices, if the Christmas season comes through as expected.
Let’s look at the tale of the tape.
JB Hi-Fi (JBH) is expected on the analysts’ forecasts collated by FN Arena to lift earnings per share (EPS) by 0.2% in FY15, to 128.6 cents, and boost dividend per share (DPS) by 1.8% cents, to 85.5 cents. At $16.17, that prices JB Hi-Fi on 12.6 times expected FY15 earnings and a prospective fully franked dividend yield of 5.3%. And analysts see JB Hi-Fi as highly under-valued: the consensus price target for the stock is $18.14, implying capital growth upside of more than 12%, if that were achieved. Although JB Hi-Fi got hammered on the market because of poor iPad sales in the final quarter of 2014 and early in the new financial year, it should pick up a boost from the iPhone 6 this Christmas (as should Harvey Norman and Dick Smith holdings.)
JB Hi-Fi (JBH)
Source: Yahoo!7 Finance, 10 November 2014
Super Retail Group (SUL) – owner of the Supercheap Auto, Rebel Sport, Boating Camping Fishing (BCF), Ray’s Outdoors and Workout World store chains – on the analysts’ forecasts collated by FN Arena, is predicted to lift EPS by 2.5% in FY15, to 56.5 cents a share. That places Super Retail on a FY15 price/earnings (P/E) ratio of 14.2 times earnings and a FY15 full franked dividend yield of 4.9%. At $8.01, Super Retail is also given ample room for price growth on its analysts’ consensus price target, sitting 17.6% below the target price of $9.42.
Super Retail Group (SUL)
Source: Yahoo!7 Finance, 10 November 2014
Dick Smith Holdings (DSH) is a stock that has risen already, off lows: from $1.88 in early June, Dick Smith has risen to $2.18, a nice surge of 16%. On the analysts’ forecasts collated by FN Arena, Dick Smith is looking at 152% growth in EPS in FY15, to 20.2 cents a share, and 74% growth in DPS, to 13.9 cents a share. At $2.18, that places Dick Smith on 10.8 times earnings and 6.4% fully franked dividend yield. And the analysts’ consensus even gives Dick Smith some more room to move, with a target price of $2.52 implying a current discount of 15.4% (Macquarie and CIMB Securities are even more optimistic: both have a price target on the stock of $2.70.)
Dick Smith Holdings (DSH)
Source: Yahoo!7 Finance, 10 November 2014
Discount retailer The Reject Shop (TRS) has had a horrible year on its share price, starting 2014 at $17.48 and sagging by 54% to $7.98, as the tough retail conditions pushed it into a profit downgrade and an eventual 25% fall in full-year profit and a seven-cent (19%) cut to the full-year dividend, to 30 cents. On the analysts’ forecasts collated by FN Arena, The Reject Shop is expected to see an EPS rise of 22.3% in FY15, to 61.5 cents a share, but lift its dividend by 6.7% cents a share to 32 cents. That prices The Reject Shop on 13 times FY15 earnings and a fully franked dividend yield of 4.0%, and analysts back that with a price target of $8.77 a share, implying a discount of 9.9% at present.
The Reject Shop (TRS)
Source: Yahoo!7 Finance, 10 November 2014
At the other end of the offering spectrum, upmarket retailer Oroton (ORL) has come through a difficult period in which revenue and profit both fell as a result of losing its Polo Ralph Lauren regional distribution licence – which accounted for about 50% of earnings – in 2013. However, Oroton did well to quickly replace that deal with a similar regional exclusive franchise agreement with Gap Inc, to develop the Gap brand in Australia and New Zealand, as well as first rights to develop Gap’s Banana Republic and Old Navy brands. On the analysts’ forecasts collated by FN Arena, EPS is forecast at 26.9 cents in FY15, with a fully franked dividend of 21.7 cents a share.
Oroton (ORL)
Source: Yahoo!7 Finance, 10 November 2014
At the share price of $4, that prices ORL on 14.9 times FY15 earnings and a fully franked yield of 5.4%. And the analysts’ consensus sees a target price of $5.06, implying a 26.4% discount at present.
Department store giant Myer (MYR), struggled in FY14 and analysts’ forecasts collated by FN Arena for EPS in FY15 show 15.9 cents a share, with a forecast fully franked dividend of 13.8 cents. Those numbers have Myer trading, at $1.89, at 11.9 times expected earnings and on a 7.3% dividend yield. Myer – which has famously never traded above its 2009 float price of $4.10 – has a consensus target price of $2.12, 12.1% above where it is at present.
Myer (MYR)
Source: Yahoo!7 Finance, 10 November 2014
Harvey Norman (HVN) is expected on the analysts’ forecasts collated by FN Arena to earn 23.5 cents a share in FY15, up 17.9% and pay a fully franked dividend of 15.7 cents, a rise of or 12.4%, on FY14. At $3.91, that prices Harvey Norman on 16.6 times forecast FY15 earnings, and a dividend yield of 4.0%. But Harvey Norman’s strong recent share price recovery – the stock is up 31% since early June – has stripped the value from the stock, with the analysts’ consensus price target of $3.68 meaning Harvey Norman sits at a 5.9% premium.
Harvey Norman (HVN)
Source: Yahoo!7 Finance, 10 November 2014
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