Global markets were mixed overnight as shares on Wall Street hovered close to all-time highs, with investors digesting corporate earnings announcements. Facebook was under pressure as more states joined New York’s investigation into whether its business practices have reduced competition or put users at risk.
Stock in Focus: Woolworths (WOW:ASX)
Recent trends have indicated that consumer spend remains weak across Australasia, with consumers opting to save rather than spend. WOW shares continue to buck the retail trend and edged higher after delivering a surprisingly solid result for the 2019 financial year.
WOW reported earnings improvement across its core food business with all business units and Big W reporting a lower operating loss than in the previous year. WOW shares have done well this year with proactive portfolio changes being well received, including the sale of its petrol business and the demerger of its Endeavor Drinks and ALH group to focus on core operations. Interest rate cuts have also made WOW’s reliable dividend appear more attractive to risk adverse investors.
However, we continue to believe the core business will succumb to greater industry pressure, especially as the supermarket industry becomes more competitive – and the market may have become too optimistic and overvalued the company with a price to earnings multiple of 26x, which is expensive for a company with low growth potential and several headwinds on the horizon.
We are currently SELL rated on WOW.
Australia & New Zealand Market Movers
The Australian market edged higher yesterday (ASX 200 Index +0.30%) but gains were capped as encouraging signs that interest rates are continuing to support the housing market were partly offset by gloomy corporate commentary on consumer spending.
Property developer Mirvac said residential enquiries picked up over the September quarter in key home buying markets of Sydney and Melbourne. The firm reaffirmed its fiscal year profit growth prediction of between 3%-4%. Evidence of still-weak consumer spending patterns came from Super Retail, which was hammered after it revealed that margins were damaged in the first 16 weeks of its new financial year as it slashed prices to tempt reluctant consumers into its stores. Ardent Leisure shares jumped +20% after a buyer paid a significant premium for its shares, according to media reports.
The New Zealand market was in positive territory on Tuesday (NZX 50 Index +0.25%) joining the upbeat mood across Asia.
SkyCity Entertainment Group hit a seven-week low as a fire atop the firm's new international convention centre raged throughout the day. It is far too early to assess the impact on both SkyCity and Fletcher Building, although it is clearly not good news. Fonterra Cooperative Group raised its forecast farmgate milk price range to $6.55-7.55 per kilogram of milk solids, citing firm demand for whole milk powder and strong prices for skim milk powder – the news will be a welcome relief for struggling dairy farmers. Outside the benchmark index, PGG Wrightson was in positive territory after affirming expectations for earnings growth at its annual meeting.
3 Things Markets Will be Watching this Week
- US earnings season for the 3rd quarter continues this week, and so far company announcements have generally beaten a low bar. Some of the higher profile results will come from Caterpillar, Microsoft, 3M, Amazon and Visa.
- The European Central Bank (ECB) meets this week, although no policy changes are expected given the range of initiatives that were announced in September.
- A number of AGM's and trading update from Australasian companies including Auckland Airport, Metlifecare, ResMed, and Qantas.
Have a Great Day,