Embattled grocery distributor Metcash Limited (ASX: MTS) could build on yesterday's 4.3% jump to $2.17 and wipe out this week's losses that were triggered by fears of a renewed grocery war due to Amazon's impending arrival to our shores.
The stock may be finding favour with investors after Morgan Stanley issued a note saying that there is a 60% to 70% chance that Metcash will outperform the industry over the next 45 days. The catalyst could come from company's full year results that will be released on Monday.
Morgan Stanley believes Metcash can deliver profit growth and is forecasting a more than 10% uplift in Metcash's earnings per share in FY18 even with a flat result from the food and grocery division, as its hardware business is well placed to drive group profit growth over the medium term.
The forecast certainly bucks the trend as consensus estimates aren't factoring in double-digit EPS growth for the new financial year given the numerous challenges facing the sector.
"We are long-time bears on supermarkets, given greater discounter competition, but we see value in MTS, given F&G self-help initiatives and hardware-led growth ahead of the FY17 results," the broker wrote.
If Morgan Stanley is right, the stock still has room to run to its price target of $2.80 a share.
The sector has been under pressure this week on news that Amazon has lobbed a US$13.7 billion takeover bid for Whole Foods Market in the US as the online titan steps up its assault on the traditional supermarket industry.
There are real fears here that Amazon will disrupt our largest supermarkets owned by Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES).
While some may be overestimating the impact of Amazon's arrival, there is little doubt that the outlook for the industry is under a cloud as established players are struggling to hold their ground against offshore rivals like Aldi and weak inflation, which makes it even harder for supermarkets to raise prices.
Throw these into the mix very low wage growth and it's hard to see what positive catalysts there are for Coles, Woolworths and IGA supermarkets.
The industry is supposed to be a relatively safe and stable sector to invest in, but that certainly doesn't seem to be the case in this environment and the outlook isn't likely to change much in FY18.
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