Value Rotation | Woolworths

4 September 2020

Global markets were  higher overnight (S&P 500 index +1.5%) with US markets reaching new record highs but with defensive and value stocks taking their turn to lead gains after data showed US private payrolls expanded last month, but at a much slower pace than expected.

The defensive utilities, consumer staples and real estate sectors which have trailed the broader market this year were some of the biggest gainers among major S&P sectors on Wednesday – rising between +2% and a little over +3%. Financials, a value sector which has also sharply underperformed this year, closed up +1.5% overnight.

Closer to home, Australia’s Treasurer has confirmed the government is considering fast tracking its stage two personal income tax cuts. resulting in a 30% tax rate for incomes between $45,000 and $200,000 to help ease the burden on households.

Woolworths (WOW:ASX)
Shares in Woolworths (WOW) have managed to hold up amidst the covid-19 pandemic as its supermarket business benefited from lockdown restrictions, being able to operate as an essential service.

As  a result, group sales for the 2020 financial year were up +8.1%, driven by the supermarket business and online sales for its other retail businesses, offsetting weaker hotel business performance. Operating costs increased due to covid-19 environment creating a -$107m negative impact and as a result  operating earnings earnings and net profit after tax fell -0.4% and -1.2% respectively from last year.

For the first 12 weeks of 2021 financial year WOW is starting the year strongly with group sales up +12.4% from last year but added the outlook for the remainder of year remains challenging given recent events particularly in Victoria and New Zealand. For the first 12 weeks – Australian Food sales are up +11.9%, New Zealand Food sales are up +8.3%, BIG W sales have jumped +21.1%, and Endeavour Drinks sales are up +23.7%, partially offset by a -31.3% decline in sales from the Hotels business.

We upgrade WOW to a HOLD due to the defensive nature of its supermarket business 

Australia & New Zealand Market Movers

The Australian market rose strongly on Wednesday (ASX 200 Index +1.8%), offsetting the previous day's losses  as investors shrugged off confirmation of Australia's first recession in 29 years.

All major sectors were up yesterday, led by the major miners BHP (+2.7%), Rio Tinto (+1.6%) and Fortescue Metals Group (+2.3%) as iron ore prices surged higher. Other major blue chips which have seen some pressure recently also performing strongly as well with the likes of  CSL (+2%), Woolworths (+2.6%), Wesfarmers (+2.3%) and Telstra (+2.5%) all making up for lost ground. 
Buy now, pay later, stocks which have been some of the stars of the recent rally but have fallen sharply again for the second day in a row after US payments giant PayPal launched its own competing buy now, pay later platform. 
Nufarm shares rose 2.6% after revealing that earnings from its Australia and New Zealand business more than doubled in the second half on good rainfall.

The New Zealand market (NZX50 Index +0.9%) rose as upbeat economic data in key markets offset the negative impact kiwi hitting a 14 month high had on major exporters.  Vista Group International led the market higher, gaining +3.9% following a lead from Wall Street tech stocks which saw strong gains overnight. Fletcher Building rose +3.8% and Restaurant Brands rose +3.4%  both stocks were likely buoyed by optimism for a stronger domestic economy. 

The Warehouse group shares fell -1.5% after the group announced plans to cut 750 jobs as they look to restructure operations at more than 60 stores. 


3 Things Markets Will be Watching this Week

  1. ​​​​​​​​​​​​​​​COVID-19 related news-flow remains key, with second wave and lockdown headlines, while US Congress debate what an extension of stimulus will look like.
  2. With reporting season all but over, focus in the week ahead returns to macro data including monthly employment figures (nonfarm payrolls) and ISM manufacturing data in the US
  3. The RBA also meets on Tuesday.
Global markets were higher overnight (S&P 500 index +1.5%) with US markets reaching new record highs but with defensive and value stocks taking their turn to lead gains after data showed US private payrolls expanded last month, but at a much slower pace

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