Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

Download the Morningstar Fact Sheet : http://corporate.morningstar.com/US/documents/MarketingFactSheets/AboutMorningstarFactsheet.pdf

Thematic (Sector/Industry)

<div class="content-highlight"><h2>Opportunities could present if the market loses its cool.</h2></div><hr><h2>An Australian Recession is Improbable, But Not Out of the Question</h2><p>Yes, we've dropped the R-word. A much-mooted concern of investors in the Australian retail sector is the potential of a more pronounced decline in consumer spending on account of the weak housing market or perhaps even a more widespread slowdown in economic activity, such as a recession. Australians have been dodging the bullet for a record-breaking 106 quarters but at some point, this lucky streak must come to an end. We avoid the futile exercise of predicting the timing of the next Australian recession and we aren't forecasting a cyclical decline in our base case. As Nobel Prize laureate Paul Samuelson famously put it: "The stock market has predicted nine of the past five recessions." However, we have travelled back in time to jog our memory on how the last Australian recession impacted the retail sector. We've run two scenarios, examining the performance of 10 Australian retail chains during the early 1990s, as case studies to understand how a similar downturn might pan out for retailers today. We analysed sales and EBIT data from fiscal 1990, the eve of Australia's last recession, to fiscal 1993, when we judge most of the associated ripple effects had dissipated.</p><hr><h2>Key Takeaways</h2><ul>
<li>We don't expect retailers to be faced with a recession anytime soon. There are some clouds gathering— real income is declining and building approvals are weak—but offsetting factors are low unemployment and correspondingly high consumer confidence. We quantify the risk of a recession at less than 25%. Neither the IMF, OECD, nor Westpac are forecasting a near-term decline in Australia's GDP.</li>
<li>Consumer staples have a reputation to be defensive investments for a reason. <a href="https://www.smartkarma.com/entities/500" target="_blank" data-smartkarma-citation="entities:500:1">Woolworths Ltd (WOW AU)</a> and <a href="https://www.smartkarma.com/entities/27799" target="_blank" data-smartkarma-citation="entities:27799:1">Coles Group Ltd (COL AU)</a> could even benefit from consumers shifting more spending towards groceries, as they did in fiscal years 1989 to 1993. However, the appeal of Aldi's discount offering could steal the show.</li>
<li>
<a href="https://www.smartkarma.com/entities/1104" target="_blank" data-smartkarma-citation="entities:1104:1">Wesfarmers Ltd (WES AU)</a>'s earnings from its Bunnings hardware business aren't defensive. Out of four categories examined, the EBIT margins of the hardware peer group were impacted the most by the recession. However, our intrinsic values are unlikely to be materially impacted.</li>
<li>A sell-off in retailing stocks due to cyclical earnings weakness could provide opportunities to long-term, fundamental investors. But beware of weak balance sheets such as <a href="https://www.smartkarma.com/entities/577" target="_blank" data-smartkarma-citation="entities:577:1">Myer Holdings (MYR AU)</a>.</li>
</ul>

Opportunities could present if the market loses its cool.An Australian Recession is Improbable, But Not Out of the QuestionYes, we've dropped the R-word. A much-mooted concern of investors in the Australian retail sector is the potential of a more pronounced decline in consumer spending on account of the weak housing market or perhaps even a more widespread slowdown in economic activity, such as a recession. Australians have been dodging the bullet for a record-breaking 106 quarters but at some point, this lucky streak must come to an end. We avoid the futile exercise of predicting the timing of the next Australian recession and we aren't forecasting a cyclical decline in our base case. As Nobel Prize laureate Paul Samuelson famously put it: "The stock market has predicted nine of the past five recessions." However, we have travelled back in time to jog our memory on how the last Australian recession impacted the retail sector. We've run two scenarios, examining the performance of 10 Australian retail chains during the early 1990s, as case studies to understand how a similar downturn might pan out for retailers today. We analysed sales and EBIT data from fiscal 1990, the eve of Australia's last recession, to fiscal 1993, when we judge most of the associated ripple effects had dissipated.Key Takeaways
We don't expect retailers to be faced with a recession anytime soon. There are some clouds gathering— real income is declining and building approvals are weak—but offsetting factors are low unemployment and correspondingly high consumer confidence. We quantify the risk of a recession at less than 25%. Neither the IMF, OECD, nor Westpac are forecasting a near-term decline in Australia's GDP.
Consumer staples have a reputation to be defensive investments for a reason. Woolworths Ltd (WOW AU) and Coles Group Ltd (COL AU) could even benefit from consumers shifting more spending towards groceries, as they did in fiscal years 1989 to 1993. However, the appeal of Aldi's discount offering could steal the show.

Wesfarmers Ltd (WES AU)'s earnings from its Bunnings hardware business aren't defensive. Out of four categories examined, the EBIT margins of the hardware peer group were impacted the most by the recession. However, our intrinsic values are unlikely to be materially impacted.
A sell-off in retailing stocks due to cyclical earnings weakness could provide opportunities to long-term, fundamental investors. But beware of weak balance sheets such as Myer Holdings (MYR AU).


The Morningstar Time Machine Revisits Australia's Last Recession

Equity Bottom-Up

<p>At our fair value estimate of AUD 13.30, <a href="https://www.smartkarma.com/entities/27799" target="_blank" data-smartkarma-citation="entities:27799:1">Coles Group Ltd (COL AU)</a> offers investors an attractive 5.1% annualised dividend yield, fully franked, underpinned by a relatively defensive income stream. However, intense competition stifles dividend growth. At a constant payout ratio of 90%, we estimate dividends to increase in line with underlying NPAT at an average rate of only about 4% per year.</p><p>An investment in Coles is essentially an investment in the Australian supermarket sector. The Coles supermarkets segment accounts for 79% of the group's operating profits in fiscal 2019. As an established consumer staple retailer, we expect Coles’ cash flow volatility is much lower than for discretionary retailers and we ascribe a low uncertainty rating.</p><p>For decades, today's market leaders Coles and <a href="https://www.smartkarma.com/entities/500" target="_blank" data-smartkarma-citation="entities:500:1">Woolworths Ltd (WOW AU)</a> gradually consolidated the Australian grocery retailing industry. However, Aldi's introduction of a hard discount channel in 2001 and rapid store-rollout reversed the trend, fragmenting the market. Other players have joined the party. Costco entered in 2009 and we anticipate Kaufland to be up and running before fiscal 2020 year-end. Amazon Australia could introduce AmazonFresh in the longer run.</p><p>Despite this gloomy outlook for further competition, Coles is well positioned to defend its turf and EBIT margins given its sheer size. In the low-margin/high-volume food retailing game, scale and entrenched supply and distribution channels are key. We don't expect Costco, Kaufland, or Amazon to materially impact Coles' top line in the near to medium term. But longer term, the threat is significant, enough for us to ascribe a no-moat rating to the Australian supermarket giant. We assign the group a Standard stewardship rating. At current prices, shares in Coles screen as slightly undervalued.</p><p><em>Analyst: Johannes Faul, CFA</em></p>

At our fair value estimate of AUD 13.30, Coles Group Ltd (COL AU) offers investors an attractive 5.1% annualised dividend yield, fully franked, underpinned by a relatively defensive income stream. However, intense competition stifles dividend growth. At a constant payout ratio of 90%, we estimate dividends to increase in line with underlying NPAT at an average rate of only about 4% per year.An investment in Coles is essentially an investment in the Australian supermarket sector. The Coles supermarkets segment accounts for 79% of the group's operating profits in fiscal 2019. As an established consumer staple retailer, we expect Coles’ cash flow volatility is much lower than for discretionary retailers and we ascribe a low uncertainty rating.For decades, today's market leaders Coles and Woolworths Ltd (WOW AU) gradually consolidated the Australian grocery retailing industry. However, Aldi's introduction of a hard discount channel in 2001 and rapid store-rollout reversed the trend, fragmenting the market. Other players have joined the party. Costco entered in 2009 and we anticipate Kaufland to be up and running before fiscal 2020 year-end. Amazon Australia could introduce AmazonFresh in the longer run.Despite this gloomy outlook for further competition, Coles is well positioned to defend its turf and EBIT margins given its sheer size. In the low-margin/high-volume food retailing game, scale and entrenched supply and distribution channels are key. We don't expect Costco, Kaufland, or Amazon to materially impact Coles' top line in the near to medium term. But longer term, the threat is significant, enough for us to ascribe a no-moat rating to the Australian supermarket giant. We assign the group a Standard stewardship rating. At current prices, shares in Coles screen as slightly undervalued.Analyst: Johannes Faul, CFA

Coles Group Offers Steady Cash Flows But Little Growth; Initiating With No-Moat and AUD 13.30 FVE

Australia

Coles Group Limited owns and operates a chain of supermarkets and department stores. The Company offers apparels, liquor, office supplies, groceries, and household products. Coles Group serves customers throughout Australia and New Zealand.

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Coles Group (COL AU)

The Morningstar Time Machine Revisits Australia's Last Recession

Opportunities could present if the market loses its cool.An Australian Recession is Improbable, But Not Out of the QuestionYes, we've dropped the...

Morningstar, Inc.

Coles Group Offers Steady Cash Flows But Little Growth; Initiating With No-Moat and AUD 13.30 FVE

At our fair value estimate of AUD 13.30, Coles Group Ltd (COL AU) offers investors an attractive 5.1% annualised dividend yield, fully franked,...

Morningstar, Inc.

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