{"id":53992,"date":"2008-03-05T21:00:15","date_gmt":"2008-03-05T10:00:15","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2008\/03\/05\/rudi-on-thursday-74\/"},"modified":"2008-03-05T21:00:15","modified_gmt":"2008-03-05T10:00:15","slug":"rudi-on-thursday-74","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2008\/03\/05\/rudi-on-thursday-74\/","title":{"rendered":"Rudi On Thursday"},"content":{"rendered":"
<\/title><\/p>\n<p>In my Weekly Analysis this week I mentioned a change in market<br \/>\nleadership that is taking place in the Australian share market. In a<br \/>\nnot too distant future the banks will no longer be the most important<br \/>\ngroup of companies in the share market, and the former Kings of Bridge<br \/>\nStreet will have to learn how to live in the shadows of the new numbers<br \/>\none: resources stocks.<\/p>\n<p>That conclusion was based upon the fact that the relative<br \/>\nrepresentation of the banks in Australia’s leading share market indices<br \/>\nhas been in gradual decline over the past few years<br \/>\nwhile resources, spearheaded by BHP Billiton ((BHP)) and Rio<br \/>\nTinto ((RIO)), have rapidly grown in relative importance. At<br \/>\nrespectively 17%, and falling, and 15%, and rising, it doesn’t take a<br \/>\ngenius to figure out there will come a point when the rising resources<br \/>\nwill meet the falling banks on their continuous climb upwards. Given<br \/>\nthe trend so far in 2008, that moment does not seem to be too far away.<\/p>\n<p>But that’s based upon both sectors’ relative weight in the major<br \/>\nindices. If you look at the share price valuations for both sectors,<br \/>\nthen the switch has already taken place. When was the last time<br \/>\nyou remember Price\/Earnings ratios for banking stocks were<br \/>\nlower than for resources?<\/p>\n<p>Wasn’t that always the key complaint from resources bulls, that<br \/>\ninvestors would not ascribe enough value to miners because<br \/>\nsecurities analysts kept on assuming the good times would only last for<br \/>\nso long?<\/p>\n<p>Well, in March 2008 the differences between both sectors<br \/>\nare significant. While the current market average PE lies<br \/>\nbetween 13 and 14.5 (depending on one’s definition of “the market” and<br \/>\non whose estimates) most resources stocks are currently trading on a<br \/>\nmultiple above that, while the banks barely manage to hold on to PEs of<br \/>\n10 (that becomes 8-something if you look further into the next fiscal<br \/>\nyear).<\/p>\n<p>Remember when the banks were on 15 and BHP on ten? That was early 2007.<br \/>\nBanks and resources have simply swapped places. What change of<br \/>\nleadership soon? It has already happened!<\/p>\n<p>Here’s another change in leadership I discovered today:<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" alt=\"Chart\" src=\"http:\/\/ichart.finance.yahoo.com\/z?s=HVN.AX&t=6m&q=l&l=on&z=m&c=MTS&a=v&p=s\" border=\"0\" height=\"288\" width=\"512\"><\/p>\n<p>Yes, that’s right, the dull and unattractive, some would even<br \/>\nsay “fragile” Metcash ((MTS)) has proven to be a better<br \/>\ninvestment than highflyer Harvey Norman ((HVN)) over the past six<br \/>\nmonths. And with a net difference of 20%, this is not something of a<br \/>\nfluke.<\/p>\n<p>This is how, if you observe the markets long enough, you come to<br \/>\nrealise that nothing is ever set in stone, and nothing stays as it is<br \/>\nfor ever. The laggards of yesteryear are in essence the champions of<br \/>\ntomorrow, and what’s holding back one company today can turn into its<br \/>\nbenefit tomorrow.<\/p>\n<p>Mind you, the chart doesn’t show but Metcash shares still lost<br \/>\na little over 10% over the past six months. Harvey Norman lost<br \/>\nconsiderably more, but that was because investors got excited about<br \/>\nsales prospects of iPods and Xboxes and Windows Vista. Harvey Norman,<br \/>\njust like JB Hi-Fi ((JBH)), was arguably trading at lofty<br \/>\nvaluation multiples, and as I pointed out over the past few weeks:<br \/>\nnothing is as damaging as contracting PEs when investors head for the<br \/>\nexits.<\/p>\n<p>But there’s also another reason why the leadership is shifting in the<br \/>\nretail sector: as investors are coming to terms with the fact that the<br \/>\nAustralian economy is slowing, they are looking into the finer details<br \/>\nof what this actually means. And while they’re analysing the outlook<br \/>\nfor Australia over the next few years, it’s not that difficult to see<br \/>\nthey will come to the conclusion that not every part of Australia is<br \/>\nthe same. There are strong regional differences in that Queensland and<br \/>\nWestern Australia -both mining regions- will likely perform stronger<br \/>\nduring the downturn than New South Wales and Victoria.<\/p>\n<p>Could it be that this perspective is already being reflected in<br \/>\ninvestor’s choices among retailers?<\/p>\n<p>A report by Citigroup this week certainly seems to suggest this is the<br \/>\ncase. On the broker’s assessment, Metcash ((MTS)) -see chart above- is<br \/>\nthe most leveraged of all retailers in Australia to the Queensland and<br \/>\nWA states. Current consensus estimates believe the company will achieve<br \/>\ndouble digit EPS growth both this year and next year. And the<br \/>\nmarket feels relatively certain this is achievable because there would<br \/>\nbe no PE ratios of 15.9 (FY08) and 14.3 (FY09) otherwise.<\/p>\n<p>But guess what? Citigroup believes second behind Metcash comes Harvey<br \/>\nNorman ((HVN)), followed by Woolworths ((WOW)).<\/p>\n<p>There’s also another reason why Metcash stands out among retailers.<br \/>\nFarmers are expected to have a bumper year ahead as rain has finally<br \/>\nreplaced drought. Guess which retailer is best placed to benefit from<br \/>\nthis? (the one in red on the chart above)<\/p>\n<p>Metcash shares don’t rate that high on the FNArena Sentiment Indicator,<br \/>\nthough still a positive 0.3 -for some reason JP Morgan continues to<br \/>\ndislike the stock- but dividend yield is currently estimated<br \/>\nat 4.7% for this year and 5% for next. The average price target<br \/>\nsuggests there is about 17.5% upside left in share price potential.<\/p>\n<p>What all this means in effect is that Metcash is trading on lower PE<br \/>\nmultiples than most others in the sector, with a higher dividend yield<br \/>\nand the best leverage to the two strongest regions in the country, plus<br \/>\na free bonus from a resurgent farmer community. It’s not really<br \/>\ndifficult figuring out why the former prince of dull-ness is suddenly<br \/>\nholding the scepter amongst all retailers, is it?<\/p>\n<p>(If you want to further investigate this change of leadership don’t<br \/>\ncompare over a six months period like I did with Harvey Norman in the<br \/>\nchart above. This change is relatively fresh and will only show up on<br \/>\nmost charts of three months or shorter.)<\/p>\n<p>Till next week!<\/p>\n<p>Your editor,<\/p>\n<p>\nRudi Filapek-Vandyck<br \/>\n(as always firmly supported by Sophia, Greg, Chris, Paula, Grahame,<br \/>\nPat, George and Joyce)<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Weekly musings from your editor. Former laggards are turning into leaders on the stock market. This does not only affect banks and resources stocks, but also the retailers.<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5],"tags":[],"acf":[],"_links":{"self":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/53992"}],"collection":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/comments?post=53992"}],"version-history":[{"count":0,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/53992\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/media?parent=53992"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/categories?post=53992"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/tags?post=53992"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}