Now’s a small window to buy this booming ASX share: expert

The time to buy this stock is now, says one professional, before it runs too hot

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There is an ASX share that’s recently transformed itself that’s not getting the attention it deserves.

That’s according to Fairmont Equities managing director Michael Gable, who reckons the time is ripe to buy into Metcash Limited (ASX: MTS).

“Metcash is transitioning from a food wholesaler facing structural headwinds to a hardware retailer and wholesaler with a market-leading trade offer,” he said on the Fairmont blog. 

“Based on the company’s results for the 6 months to 31 October 2021 (1H22), the transition is happening faster than expected.”

Hardware now contributes more than food

For a company associated with the ubiquitous IGA supermarket chain, it is incredible that the hardware business now brings in more money than groceries.

“The hardware division reported an outstanding result, with strong contribution from both the Total Tools acquisition and the pre-existing Independent Hardware Group (IHG) business.”

According to Gable, the trade segment is “the key driver of strength” within Metcash’s hardware division.

The hardware business saw revenue growth of about 18%.

“Profitability also improved meaningfully, with hardware posting EBIT [earnings before interest and taxes] margins of 6.7%,” said Gable.

“This was 160 basis points higher than 1H21 and the highest in over 7 years — and driven by Total Tools.”

Store roll-out and “retailer conversion strategy” at Total Tools is a “key growth driver” for Metcash, according to Gable.

“There were 94 stores in the network and Metcash is targeting [approximately] 130 stores by 2025 and plans to open [approximately] 10 stores per annum,” he said.

“This expansion is likely to lead to a material step-up in network sales and divisional EBIT of $85m over the next 5 years.”

Metcash’s supermarket business isn’t doing badly either

Despite being eclipsed by the hardware arm, Gable insisted Metcash’s supermarket business is in a “significantly better competitive position” than 2 or 3 years back.

“The company has been able to maintain a premium in shelf prices, has a successful store refurbishment program (where IGA retailers are re-investing in their stores), and has markedly improved its market share,” he said.

“To date, much of this market share has been retained.”

Metcash, due to its position as a wholesaler, is “a net beneficiary of inflation”.

That is because wholesale contracts are typically written in terms of a percentage of sales basis, rather than a flat dollars-per-item rate.

“Metcash is expected to pass on price inflation that it receives to its retail partners in order to maintain its relative price position in comparison to the market,” said Gable.

“This is where IGA has typically enjoyed a pricing premium given its increased convenience offer in comparison to the major competitors.”

Now’s the time to buy Metcash shares

A 2 December dip saw the Metcash share price bottom out at $3.92.

Back then, Gable forecast that he would buy in when the stock gained upwards momentum past the $4.30 “breakout” mark.

Well, the market has since cottoned onto Metcash’s tailwinds and has already driven the stock price up 10%. The Metcash share price closed Thursday at $4.34.

“Metcash should continue to rally from here,” said Gable.

“The slight dip and retest of the breakout from the past day or so is another buying opportunity before the share price gets too far away from the breakout.”

Longer term, Metcash shares have gained around 26% this year and 90% over the past 5 years. The stock also yields a handy 4.61% in dividends.

Should you invest $1,000 in Metcash right now?

Before you consider Metcash, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Metcash wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of January 13th 2022

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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