The S&P/ASX 200 Index (ASX: XJO) retailer Metcash Ltd (ASX: MTS) is a very compelling stock for 2025, in my mind.
We can't know for sure what a share price will do. However, I believe that events could happen in 2025 that turn headwinds into tailwinds for the business, which could subsequently excite investors.
Metcash is a diversified business with three different segments. First, it has a food division that supplies IGA supermarkets around Australia and a food distributor business that supplies other businesses (such as restaurants, cafes, and hotels).
Second, it has a liquor division that supplies a number of Australia's largest independent liquor retailers, such as Cellarbrations, The Bottle-O, IGA Liquor, and Porters Liquor.
Third, it has a hardware division that includes several businesses, including Mitre 10, Home Hardware, Total Tools, Alpine Truss, and Bianco Construction Supplies.
Hardware headwinds
I believe the elevated interest rates have been problematic for the demand for hardware and tools across Australia. In the HY25 result, Metcash reported that overall underlying EBIT was flat at $246.1 million thanks to the food division, but hardware earnings declined 15.1% to $93.9 million, reflecting "weaker trade activity, increased cost pressures and intense price competition".
But, the ASX 200 retailer share could benefit from an expected impending interest rate cut, or cuts, in 2025. For example, in the Commonwealth Bank of Australia (ASX: CBA)'s FY25 first-half results announcement, the CBA CEO Matt Comyn said:
The Australian economy has slowed considerably, with cost of living pressures continuing to weigh on consumer demand and younger customers in particular making real sacrifices. Private sector growth is weak, immigration is starting to slow and geopolitical uncertainties remain.
However underlying inflation is now moderating towards the target range and we expect Australia will follow offshore economies with an easing cycle starting in 2025. This should provide some relief to many households and improve business confidence. The strong labour market and level of ongoing public sector infrastructure spend also provide cause for optimism on the domestic economic outlook.
If interest rates start coming down, this could both boost demand for hardware products and improve investor sentiment about the business.
Low valuation for the ASX 200 retailer share
The company seems to be going through the bottom point of its hardware earnings cycle, and it's only trading at around 12.5x FY25's estimated (weak) earnings, according to UBS projections. That's very low considering Metcash's earnings are predicted (by UBS) to rise each year between FY26 and FY29, with FY26 profit predicted to rise 8.3%.
On top of that, it could pay a grossed-up dividend yield of 7.7%, including franking credits, for FY25.
I think the Metcash share price could be at least 20% undervalued if the RBA starts cutting rates this year and subsequently causes the forward price-earnings (P/E) ratio to rise to, say, 15 (or more). For what it's worth, UBS rates Metcash shares as a buy with a price target of $3.50.
