I think the market is wrong about this beaten-up ASX 200 share

A man in a business suit wearing boxing gloves slumps in the corner of a boxing ring representing the beaten-up Zip share price in recent timesA man in a business suit wearing boxing gloves slumps in the corner of a boxing ring representing the beaten-up Zip share price in recent times

In my opinion, the market is being harsh on the S&P/ASX 200 Index (ASX: XJO) share Metcash Ltd (ASX: MTS).

Metcash may not exactly be a household name, even though many of the businesses that it’s involved with are very recognisable.

There are three pillars to the business: food, drink and hardware.

Metcash’s food division supplies IGA and Foodland stores around the country. The liquor segment supplies a number of brands including Cellarbrations, The Bottle-O, IGA Liquor, Thirsty Camel, Big Bargain Bottleshop, Duncans and Porters Liquor.

The hardware division owns a few different brands including Home Timber & Hardware, Mitre 10, Hardings and Total Tools. It also supports independent operators under the small format convenience banners Thrifty-Link Hardware and True Value Hardware.

Is the market being harsh on the ASX 200 share?

I think we can compare the Metcash business somewhat to names like Coles Group Ltd (ASX: COL), Wesfarmers Ltd (ASX: WES) and Woolworths Group Ltd (ASX: WOW).

Over the past year, Wesfarmers shares are up 7%, Woolworths shares are up 0.33% and Coles shares are down 2%.

Yet, the Metcash share price is down 15%.

Looking at the Metcash share price, it could be considered the cheapest one. According to Commsec numbers, it’s valued at under 13 times FY23’s estimated earnings.

Let’s compare that to the valuations of its peers. Wesfarmers is priced at over 24 times FY23’s estimated earnings, Woolworths is priced at 28 times FY23’s estimated earnings and Coles is priced at under 23 times FY23’s estimated earnings.

On these numbers alone, the ASX 200 share looks significantly undervalued.

But I think there are a few key reasons why investors should back the business as an investment option.

Why Metcash shares look undervalued

The low price/earnings (P/E) ratio that I just noted also means that it has a relatively high dividend yield, helped by its dividend payout ratio of 70% of underlying net profit after tax (NPAT).

In FY23, the ASX 200 share could pay a grossed-up dividend yield of 7.9%. That’s a stronger dividend yield than what its peers may pay.

On top of that, the business reported ongoing growth in the first four weeks of FY23, which I think is impressive. Food sales had grown by 4%, hardware sales had grown by 8% and liquor sales had grown by 8.9%.

Sales growth is a very useful boost for growing earnings, plus increased scale gives it a good chance of benefiting from scale benefits.

The business is investing in a number of areas including “loyalty, digital, e-commerce, data, network optimisation and development” according to Metcash CEO Doug Jones.

Metcash has also commented that there is an increased preference by customers for local neighbourhood shopping. Jones said that shoppers are recognising “the increased competitiveness, differentiated offer and relevance” of its network of independent stores.

I think Metcash shares are significantly underrated by the market and trade at a much cheaper valuation than the supermarket giants.

The post I think the market is wrong about this beaten-up ASX 200 share appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Coles Group and Wesfarmers. The Motley Fool Australia has recommended Metcash. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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