The stars could be aligning for consumer-facing stocks as Morgan Stanley believes the Aussie consumer is at an inflection point now that the federal election is done and dusted.
But the win by the tax-cut hungry Coalition win isn’t the only factor that could lift consumer spending. The broker also pointed to easing worries about the housing market and falling interest rates as other tailwinds for ASX-listed retailers.
That message seems to be resonating with investors with the sector outperforming the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index by about a 0.6% margin this morning with the Wesfarmers Ltd (ASX: WES) share price, Harvey Norman Holdings Limited (ASX: HVN) share price and Webjet Limited (ASX: WEB) share price leading the group higher with gains of 1.5% to 2% each.
The stocks to target though are those with low earnings risk and trading at relatively cheap earnings multiple, according to Morgan Stanley.
Below are the broker’s four favourite retail stocks to buy:
Flight Centre Travel Group Ltd (ASX: FLT): The broker thinks the FLT share price has been oversold following its profit warning that was largely driven by one-off factors in its Australian leisure business. Morgan Stanley believes these headwinds are easing and that the investors are also underappreciating its corporate travel business, which now represents around 60% of FY19 earnings.
Metcash Limited (ASX: MTS): While the grocery distributor trades in line with its long-term average one-year forward P/E [price-earnings] multiple, the broker thinks that the higher proportion of non-food earnings should command a higher multiple. Further, its food business is set to benefit from faster food inflation too.
JB Hi-Fi Limited (ASX: JBH): The electronics and whitegoods retailer is trading at a discount to its longer-term average P/E of around 14.2 times and Morgan Stanley thinks that’s unwarranted, particularly given there are signs of a turnaround at The Good Guys business and the negligible impact from Amazon’s entry into the market. JB Hi-Fi should also get an end of financial year sales boost as consumers have traditionally stepped up buying before the tax deadline.
Super Retail Group Ltd (ASX: SUL): One-year forward consensus P/E forecast for the retail group puts it at around a 14% discount to the stock’s long-term average and Morgan Stanley thinks this isn’t justified as lower capex will lift Super Retail’s free cash flow growth, sales at its automotive chain are resilient through the recent cycle and signs that Amazon isn’t negatively impacting on its business.
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The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited and Wesfarmers Limited. The Motley Fool Australia owns shares of Super Retail Group Limited. The Motley Fool Australia has recommended Webjet Ltd. 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 Scott Phillips.