- The sector differences in growth and valuation create investment opportunities.
- The sportswear industry looks well balanced between growth and valuation.
- Online retailers are growing fast but still find it difficult to become profitable for investors.
On May 13 the Commerce Department reported an advance in monthly US retail and food services sales for April of 1.3% to $453.4 billion, not adjusted for price changes. Inflation was 0.4% for April on a seasonally adjusted basis thus the growth in retail can be assessed as an important spur for the economy. This article is going to analyze sector changes and general trends in order to give some insight on how to better position one’s portfolio.
The motor vehicle and parts dealers’ sales increased 3.2% from March 2016 and 3.1% from April 2015. The April advance completely cancels the stagnation from the last 12 months and puts a question mark on the relative cheapness of the US auto and truck industry that has a trailing PE ratio of 13 (PE ratio averages are sourced from Damodaran Online that compiles data for US companies from service providers on a yearly basis—January 2016—and biz.yahoo). A growth of 3.2% might significantly lower the expected forward PE ratio of 46.53 for the industry and provide good investment opportunities.
Furniture and home furniture stores sales rose 3.6% from April 2015 which is relatively ok when attached to a trailing PE ratio of 20.14 and a forward PE ratio of 16.94.
Electronics and appliances stores do not show positive signs with a sales decline of 2% in relation to April 2015, which makes a PE ratio of 20 look a bit overvalued. Negative news is also related to department stores that have seen a decline of 1.7%, and gas stations with a 9.4% decline since April 2015. Surprisingly, department stores have a high PE ratio of 35 for a negative price to cash flow and a very low profit margin of 1.8%. If you think that there could be a huge rebound in sales for department stores, then an investment at these valuations might be reasonable but otherwise it is best to stay away.
Food and beverage stores have seen sales grow by 2% from April 2015 but show a relatively high PE ratio of 26. Low interest rates enabled the building of many new stores that resulted in increased competition. Increased competition should put pressure on margins that could lower earnings and push PE ratios even higher, no matter the sales growth.
Sporting goods, hobby, book and music stores showed a nice increase of 4.2% and miscellaneous store retailers were even better with an increase of 4.7% from April 2015. The sporting goods sector has a PE ratio of 24.5, while sporting goods stores have a lower one of 19.5. This is only a continuation of a trend started 7 years ago since when sports apparel and footwear sales jumped 42% to $270 billion in sales globally. Investors interested in investing in sports apparel and footwear should not look at the PE ratio of 24.5 as high due to the fact that the global growth in sales is expected to continue on strong tailwinds from Asia and Latin America.
Figure 1: Expected yearly additions to sportswear sales by continent in billions. Source: Morgan Stanley.
The global sportswear industry is estimated to grow by 30% to 2020.
Two sectors that show respectable growth of 8.1% and 8.2% are building material, garden equipment and supplies dealers and health & personal care stores. But they also show high PE ratios with building materials at 28.88, while healthcare products have a PE ratio of 40. The trend is obvious in healthcare as the baby boomers are starting to retire and need more health care, but these positive numbers are bound to create lots of competition and probably keep the high valuations.
The winner of the sector analysis are online retailers with a growth of 10.2% from April 2015. Unfortunately for investors wanting to grasp that opportunity, the sector has really high valuations with an average of 104.32 and a forward PE ratio of 89.7 that indicates the difficulty online stores have in creating sustainable profits despite the growth in sales.
The US retail report tells us a few important things. First, sector differences are huge with a 10% growth in online and a 9% decline in gasoline. By combining such variations with a PE ratio for the sector it is possible to find undervalued investment opportunities. For example, the automotive industry does not show signs of slowing down but its valuation is almost 50% below market average while online retail does show huge sales growth but low profitability growth as the trailing PE ratio is 104 and the expected forward PE ratio is not much lower at 89. The most balanced sector in relation to growth and valuation seems to be the sporting industry where the potential global growth is not accounted in the 4.2% yearly US growth. We’ll do a deeper investigation into the sportswear industry investment opportunities in one of our upcoming articles.