The fate of the big retailers is very much a pointer towards the health of the economy — and vice verca. A number of analysts are looking at Myer which is providing a read on both the economy and the underlying state of the stock market. The picture is for the most part pretty neutral, certainly not a serious cause for concern. The stock is on a fully franked forward earnings yield of about 8 per cent, which is high. The forward earnings multiple is about 10 times, which also suggests there is value unless the economy takes a major hit.
But it is an indication of just how much fear there is in the market that brokers are not rushing to recommend the stock. The need to address the challenge of online competition is uppermost in many analysts’ eyes. JP Morgan has a neutral rating and a 12 month price target of $2.62:
Neutral retained. Despite upbeat commentary provided by the company and a developed strategy about becoming an omni-channel retailer, until we see signs of sales growth being achieved, we suggest the risk to sales and earnings is skewed to the downside for MYR. Furthermore, given our current DCF valuation (A$2.58 per share) and the tough discretionary retail environment, we believe the risk reward is not compelling. We retain our negative stance on consumer discretionary companies in the retail sector.
Deutsche also has a hold, expressing doubts about the growth of demand in the economy:
Conditions challenging. Stagnant space raises doubt about growth outlook
Our channel checks have provided little to suggest that discretionary retail conditions are improving. While last week’s interest rate cut is helpful and Myer will benefit from a very weak comparable during the important Christmas trading period, we believe this is encompassed by management’s guidance. The stock is trading on a depressed valuation however today’s revelation that the store network will be rationalised over the next five years leaves us cautious that the growth expected from the store rollout may not be delivered. Hold retained.
UBS has upgraded the stock to a buy with a price target of $2.65, arguing the stock gives the best leverage to rising consumer demand:
Superior operating leverage means MYR offers the best exposure to improving sentiment and spending into Christmas. We believe the November rate cut is supportive of a continuation of October sales & markdown trends into Christmas, leaving MYR well positioned to deliver upside to both UBS and consensus estimates. The above coupled with the undemanding valuation and strong OpFCF yield lead us to upgrade our rating to Buy.
There are some growing signs of improvement in consumer demand, for the past three months at least. But retail is still to be approached with some caution. The savings drive have plateaued, freeing more disposable income, then again, if Europe gets worse, like today, it may go even higher. And Myer’s management is not overly convincing. The high yield does give downside protection, but capital growth may be hard to get.