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Metcash fights back

Metcash (ASX: MTS) may be feeling the pressure from its bigger competitors but this company might be the unloved stock that is ready to make a move.

Metcash performs similar functions to its bigger counterparts, Woolworths (ASX: WOW) and Wesfarmers (ASX: WES), but is much cheaper and just as lucrative for investors wanting high yields. Metcash has four business units including Food and Grocery, Australian Liquor Marketers, Mitre 10 and Automotive Brands Group (ABG).

Today, it was announced that the company will acquire wholesale car and truck parts business Australian Truck and Auto Parts Group (ATAP) for $84 million. The company purportedly generates revenues around $90 million annually, a purchase that will help strengthen ABG’s core business activities.

Metcash is well placed to take on the business and will take advantage of its strengths in warehousing, distribution and marketing to service the business. Chief executive Andrew Reitzer said “the automotive aftermarket parts retail sector is a large market worth $5.6 billion” and the acquisition “will provide potential for growth within Metcash’s hardware and automotive pillar”.

As Wesfarmers and Woolworths battle over prices and force each other to lower costs, Metcash could fill the void that provides consumers with products and services that deliver quality rather than quantity. The drawback for the company is that it cannot offer prices lower than the big two but the upside is better from a stock investing perspective, Metcash is value for money and offers yields that should be considered first rate.

Foolish takeaway

Woolies and Wesfarmers offer dividends of 3.7% and 4% respectively, but Metcash offers a 6.6%, 100% fully-franked return. In addition, the big two are more expensive from a P/E perspective, whilst Metcash currently sits on a P/E of 13, both the bigger rivals operate over 18. There’s no doubt, this company has been overlooked, even with its huge dividend yield.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Owen Raszkiewicz owns shares in Metcash. 

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