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Top broker tips earnings surprises for Woolworths Group Ltd and JB Hi-Fi Limited

The upcoming reporting season will give investors big clues on which stocks are best placed to outperform through 2018 and the ones we should be avoiding.

History has shown that it is usually the companies that deliver above and beyond that tends to run ahead of the S&P/ASX 200 (Index:^AXJO) (ASX:XJO).

Two stocks that are tipped to fall into this category are supermarket giant Woolworths Group Ltd (ASX: WOW) and music and electronics retailer JB Hi-Fi Limited (ASX: JBH), according to Deutsche Bank analysts.

“We expect Woolworths has continued to deliver strong LFL [like-for-like] sales growth which should drive op leverage and margin expansion,” said the broker.

“JB Hi-Fi has benefited from strong consumer electronics demand and market share gains which leaves room for the stock to re-rate further.”

Industry sources have revealed that Woolies has maintained its growth momentum, including through the all-important Christmas trading period, while its archrival Wesfarmers Ltd’s (ASX: WES) Coles Supermarket has been losing ground.

The broker is expecting LFL growth of 4.5% for Woolworths’ supermarket business while only 0.5% growth for Coles as it continues to lose market share to the former.

LFL is a retail industry term that measures growth at outlets that have been operating for a year or more.

“Importantly, we expect meaningful margin expansion for Woolworths driven by reduced shrinkage, increased supplier support and operating leverage now that the significant cost investment is largely in the base,” added the broker.

However, conditions for Woolworths’ Big W department store business is expected to remain challenging although Deutsche is expecting to see some signs of improvement, at least when it comes to sales growth.

Meanwhile, sales of the iPhone X, small appliances and new generation TVs have also been a bright spot for Australian retailers. This bodes well for JB Hi-Fi and for its rival Harvey Norman Holdings Limited (ASX: HVN).

While this is probably well known by the market, Deutsche thinks JB Hi-Fi is well placed to surprise investors given that it has also won market share from Harvey Norman through aggressive marketing promotions (which it probably undertook to fend off the launch of Amazon.com in Australia).

These promotions were partly funded by its suppliers and JB Hi-Fi’s recently acquired Good Guys business is likely to deliver better than expected results given the low market expectation for the business.

Deutsche has a “buy” recommendation on both JB Hi-Fi and Woolworths with a price target of $30 and $29 a share, respectively.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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