The iron ore price is getting extra support after Vale SA (NYSE: VALE) cut its production guidance for 2021 and 2022.

The news could give the Fortescue Metals Group Limited (ASX: FMG) share price, Rio Tinto Limited (ASX: RIO) share price and BHP Group Ltd (ASX: BHP) share price an extra boost.

As it stands, ASX shares are poised to rally as fears of the Omicron COVID-19 ease. The futures are pointing to a 0.6% rise in the S&P/ASX 200 Index (Index:^AXJO) this morning.

Production downgrade triggers iron ore price uplift

Our biggest miners have an extra reason to cheer. Their large Brazilian rival lowered its production target to 315 million to 320 million tonnes this year. That compares to its previous goal of 315 million tonnes to 335 million tonnes.

Vale also downgraded its 2022 production estimates to between 320 million and 335 million tonnes. Consensus estimates pegged next year’s output at 346 million tonnes, reported Bloomberg.

Vale is prioritising value over volume to protect margins. This is why it’s holding back shipments of lower-quality ore.

The miner provided the update during its investor day at the New York Stock exchange overnight.

Still cashed up

This isn’t the only piece of good news it’s delivering to ASX iron ore miners. The Rio de Janeiro-based miner is flushed with cash even as the price of iron ore and other key commodities have tumbled.

This could give some confidence to ASX investors that our iron ore producers do not need record iron ore prices to keep paying big dividends.

Vale is the world’s second largest iron ore producer after Rio Tinto. It’s also worth remembering that Rio Tinto issued disappointing production numbers more than once this year.

Iron ore price finding supply side support

The upside to the downgrades is that the supply cuts will help support the tentative iron ore price recovery.

The steel making ingredient has plunged deep into a bear market after hitting an all-time high above US$200 a tonne. It’s currently trading around half that.

China’s orders to reign in steel production in that country triggered the sell-off. Power shortages exacerbated the drop in demand for iron ore by steel mills.

However, the iron ore price has recently appeared to have bottomed around US$90 a tonne. The trillion-dollar infrastructure plan by the US and talk of Chinese economic stimulus to support the Asian giant are giving hope that commodity demand won’t be as weak as the bears are expecting.

If this is true and the supply side stays soft through 2022, ASX iron ore miners could find renewed support early in the new year.

The post Here’s why the iron ore price is in the spotlight today appeared first on The Motley Fool Australia.

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• 5 things to watch on the ASX 200 on Tuesday
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• Here are the top 10 ASX shares today
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• Here’s why the BetaShares Crude Oil Index ETF (ASX:OOO) is sliding 5% today

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Fortescue Metals Group Limited, and Rio Tinto Ltd. 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 no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Ramsay Health Care Limited (ASX: RHC) share price has been underperforming in 2021.

Since the start of the year, the private hospital operator’s shares have risen just 5.5%. This follows a 7% decline so far in November.

Is the Ramsay share price good value now?

The subdued performance of the Ramsay share price this year has been driven by concerns over the difficult trading conditions the company is facing in Australia from lockdowns.

The good news, though, is that the team at Goldman Sachs believe this underperformance is a buying opportunity for investors.

According to a recent note, the broker has reiterated its buy rating and $74.00 price target on its shares.

Based on the current Ramsay share price of $66.20, this implies potential upside of approximately 12% for investors over the next 12 months.

Goldman is also forecasting a dividend yield of approximately 2% in FY 2022, bringing the total return on offer to ~14%.

Why does Goldman like Ramsay?

Goldman continues to highlight Ramsay as one of the more attractive recovery trades across its coverage.

It commented: “RHC’s operating performance in 1Q22 was heavily impacted by various restrictions, lockdowns and other challenges associated with the pandemic. However: 1) these dynamics were widely understood (and experienced by most) prior to today; and 2) positive revenue growth (+1.3%) was ahead of our expectations given the severity of disruption during the period (widespread elective surgery bans/restrictions, isolation orders/lockdowns and infection-driven staffing shortages/procedure cancellations).”

“Despite these challenges, growth was positive in each of UK (+21%), Europe (+5%) and Asia (+15%), as the extent of volume recovery more than offset the impact of Covid-driven disruption and, whilst operating performance remains some way below pre-Covid levels, an improving trajectory is clear, and we believe the set-up for 2022 looks favourable,” the broker added.

All in all, Goldman Sachs appears to believe it could be worth sticking with the Ramsay share price and sees strong returns on the horizon.

The post The Ramsay Health Care (ASX:RHC) share price has tumbled 7% this month. Is it a buy? appeared first on The Motley Fool Australia.

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• Top brokers name 3 ASX shares to sell next week
• Broker gives its verdict on the Ramsay Health Care (ASX:RHC) share price
• 5 things to watch on the ASX 200 on Friday

Motley Fool contributor James Mickleboro 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 recommended Ramsay Health Care Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The PolyNovo Ltd (ASX: PNV) share price has been under pressure in recent weeks. Since the beginning of November, the burns treatment specialist has fallen nearly 24% in value. Meanwhile, the overall healthcare sector has gained 1.4% during November.

Unfortunately for investors, a swift exit of the company’s managing director and CEO, Paul Brennan, threw a hefty dose of uncertainty into the mix. The sudden departure couldn’t come at a worse time with the business experiencing headwinds to its sales and product pipeline.

Unsurprisingly, market participants seeking to profit from the weakness have pounced on PolyNovo. In turn, the short interest for the company’s shares has surged.

How badly is the PolyNovo share price being shorted?

According to the latest ASIC short position report, it isn’t pretty for the PolyNovo share price. On 23 November 2021, 7.28% of the company’s shares on issue were reported as being short positions (betting the share price will fall). This represents a notable increase from the 6.06% short interest at the beginning of November.

However, the contrast in sentiment becomes even clearer when compared to the same time last year. On 23 November 2020, the short interest in PolyNovo amounted to 4.97%.

It appears market participants have only grown stronger in their conviction for a downwards movement in the PolyNovo share price. This is despite shares falling nearly 55% from the same time a year ago.

What about the numbers?

Those that are negative on the PolyNovo share price could be looking at the relatively rich valuation on the company.

Currently, the burns treatment company holds a market capitalisation of $960 million. Meanwhile, for the 12 months ending June 2021, PolyNovo reported revenue of $29.16 million. This reflects a price-to-sales (P/S) ratio of approximately 33 times.

For comparison, another ASX-listed healthcare company — Australian Clinical Labs Ltd (ASX: ACL) — has a P/S of approximately 1.3 times.

The post Here’s why the PolyNovo (ASX:PNV) share price is attracting increased short interest appeared first on The Motley Fool Australia.

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• ASX 200 (ASX:XJO) midday update: Sydney Airport agrees to takeover, Wesfarmers’ strikes API deal

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended POLYNOVO FPO. The Motley Fool Australia has recommended Australian Clinical Labs Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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At the current National Australia Bank Ltd (ASX: NAB) share price, could it actually be the best big four bank to buy?

Normally ‘big four’ refers to NAB, Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group Ltd (ASX: ANZ). But these days, in market capitalisation terms, it could be called ‘big five’ with Macquarie Group Ltd (ASX: MQG) included in there as well.

But compared to the other domestic banking giants, is NAB now the best one to own?

Interestingly, in terms of shareholder returns, the NAB share price has actually been the best performer in the last 12 months, rising by 18.8%. CBA shares have risen 18.6%, ANZ shares have gone up 17.6% and Westpac shares have climbed 3.9%.

But what about the future?

For the WAM Leaders Ltd (ASX: WLE) portfolio, the fund managers at Wilson Asset Management prefer NAB to the other options.

WAM said after NAB’s FY21 result:

National Australia Bank continues to be our preferred exposure in the banking sector due to its capable management team, a sector-leading business bank taking market share, further progressed cost management initiatives than peers, and its strong capital position.

NAB share price valuation

The next financial year can have an impact on how much investors and analysts think the business is worth.

Let’s look at the estimates on Commsec, which may be able to provide some clarity on valuations with regards to FY22 earnings.

NAB shares are valued at 14x FY22’s estimated earnings.

After a sizeable decline recently, CBA shares are still valued at 18x FY22’s estimated earnings.

Westpac shares are valued at 11x FY22’s estimated earnings.

ANZ shares are valued at 12x FY22’s estimated earnings.

It’s still a materially cheaper than CBA shares, but now priced a bit more than the other two. Investors such as WAM now appear to be liking the business and giving it a higher quality rating.

Any potential downsides for the bank?

Some brokers like Morgans and Credit Suisse are concerned about the AUSTRAC investigation that’s happening, which is influencing their thoughts on the NAB share price.

Earlier this year, NAB acknowledged that AUSTRAC had identified “serious concerns” with its compliance relating to rules regarding anti-money laundering (AML) and counter-terrorism financing (CTF).

AUSTRAC advised NAB in a letter that it is AUSTRAC’s view that there is “potential serious and ongoing non-compliance” with customer identification procedures, ongoing customer due diligence and compliance to rules.

AUSTRAC’s enforcement team has initiated a formal enforcement investigation. However, it was said that, at that stage, AUSTRAC was not considering civil penalty proceedings and that this decision is “reflective of the work undertaken” by NAB to date.

The brokers that I’ve mentioned, including Morgans and Credit Suisse, rate NAB shares as a hold/neutral. But both of their price targets are mid-single digits higher than where NAB is right now.

The post At this share price, is NAB (ASX:NAB) the best big 4 bank to buy? 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 recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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There are a number of ASX shares that have seen a decline of their share prices in recent times. But they could be attractive opportunities with their long-term growth plans.

Between the Omicron COVID-19 variant and business updates, the two businesses in this article could be leading ideas.

Here are two top ASX shares that could be opportunities:

Bapcor Ltd (ASX: BAP)

Bapcor is a leader of auto parts in Australia and New Zealand with a number of different businesses including Burson, Autobarn, Autopro and Truckline.

Over the last week, Bapcor shares have declined 14% over the last week.

Last week, the business announced that its veteran CEO and Managing Director Darryl Abotomey is going to retire at the end of February 2022. He has been the boss for a decade.

Mr Abotomey commented that the business has been transformed and is strong operationally and financially. The business is currently undertaking a global search for a new CEO.

Bapcor has expanded its Asian exposure with an investment in Tye Soon to buy 25% of the Singapore-listed auto parts business which has operations in places like South Korea, Malaysia, Singapore and Australia.

The ASX share itself wants to grow its network from approximately 1,100 today to more than 1,500 locations over the next five years. Retail represents the largest increase in numbers for this goal. Bapcor also wants to grow its own brand product market penetration which will increase profitability.

The business also plans to build its network of Bursons in Asia, where it currently has an early foothold in Thailand.

Bapcor is looking to improve it is supply chain and become even more efficient.

As the number of vehicles in Australia increases, the average age of vehicles is getting older and the number of parts required continues to increase.

Pushpay Holdings Ltd (ASX: PPH)

Since the start of November 2021, the Pushpay share price has fallen almost 30%.

A few weeks ago, the business reported its FY22 half-year result. It provides electronic donation processing services as well as church management tools.

HY22 saw total processing volume and operating revenue both increase by 9% in the first six months of the financial year. It’s expecting continued growth in the number of donor management system products used by customers, further development of its product set resulting in higher usage, and higher digital giving.

Underlying operating profit (EBITDAFI) increased 12% to US$296 million, showing profit was rising faster than revenue. The gross profit margin increased from 68% to 69%. Pushpay’s net profit after tax surged 43% to US$19.1 million.

The ASX share is planning to attract new customers and expand into new segments.

Pushpay is expanding into the Catholic segment with a goal of capturing 25% of the Catholic church management market over the next five years.

Whilst the business is expecting longer-term growth, Pushpay downgraded its expectations for this year and said underlying EBITDAFI is expected to be between US$60 million to US$65 million in FY22.

According to Commsec, the Pushpay share price is valued at 16x FY24’s estimated earnings.

The post Are these 2 top ASX shares beaten-up buys? 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. owns shares of and has recommended PUSHPAY FPO NZX. The Motley Fool Australia owns shares of and has recommended PUSHPAY FPO NZX. The Motley Fool Australia has recommended Bapcor. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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All eyes will be on the AMP Ltd (ASX: AMP) share price on Tuesday.

This follows the release of an update on the financial services company’s demerger plans.

AMP share price on watch following demerger update

This morning AMP provided an update on its planned demerger and the strategic growth plans for the two post-demerger businesses – AMP Limited and AMP Capital’s Private Markets business (PrivateMarketsCo).

According to the release, the company continues to make strong progress on the operational separation of PrivateMarketsCo, in preparation for a demerger during the first half of 2022.

Management notes that a clear perimeter has been set with the agreed sale of the Global Equities and Fixed Income (GEFI) business and transfer of the Multi-Asset Group (MAG) to AMP Limited.

Why is there going to be a demerger?

AMP revealed the rationale for the demerger. It is to enable the two businesses to increase focus on their respective markets and growth opportunities.

This will see AMP Limited operate as a retail wealth manager in Australia and New Zealand, and PrivateMarketsCo as a global manager of infrastructure and real estate investments with a growing focus on international institutional clients.

In respect to the latter, its strategy will focus on leveraging the significant opportunity to become a global leader in the fast-growing private markets industry.

It aims to achieve this by delivering autonomy through an effective separation and demerger from AMP, simplifying the business and organisation structure and achieving a run-rate cost base of A$300 million by FY 2023, growing its client base through a newly established global client solutions team and scaling its existing infrastructure and real estate investment strategies, and diversifying its product offering to clients. This includes potential new investment strategies structured to meet client specific interests globally.

As for AMP Limited, its strategy will focus on renewing purpose and values to put the customer at the centre, drive culture transformation, and reposition core capabilities to drive growth in banking and wealth platforms. Management also sees opportunities to make significant cost reductions and explore new avenues such as retirement and direct-to-consumer solutions.

Management commentary

AMP’s Chief Executive, Alexis George, is optimistic on the future of the two businesses.

She commented: “In AMP Limited and PrivateMarketsCo we have two businesses with considerable growth opportunities, but which operate in very different markets, with different customers, and geographic focus. Separation and demerger will enable both businesses to accelerate their growth strategies, as well as simplify and improve efficiency.”

“We see a significant gap in the market in retirement and have strong capability within our business to better serve this market. We also believe we can further scale our business by taking our products direct to clients,” George added.

PrivateMarketsCo’s Chief Executive, Shawn Johnson, added: “PrivateMarketsCo is a business that will thrive with greater focus and independence. Our team has built a strong track record in infrastructure and real estate – and has the capability to expand into new adjacencies and pursue further global growth opportunities, supported by increasing demand for private markets assets from investors around the world.”

The post AMP (ASX:AMP) share price in focus following demerger and strategy update appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro 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 no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Ask a Fund Manager

The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part 2 of this edition, Sam Granger, Founder of Equanimity Partners, reveals why these 2 leading international shares recently made it into the Equanimity High Conviction Fund.

Motley Fool: In part 1 of our interview, you mentioned that the Australian market is looking quite expensive for high-quality businesses, and you’re finding better risk/reward profiles overseas. Which international shares look to deliver strong performance?

Sam Granger: New high conviction positions initiated in the fund over the past year include German listed meal kit business HelloFresh SE (ETR: HFG) and subscription streaming service Netflix Inc (NASDAQ: NFLX).

Both businesses are led by exceptional founders, have long runways for growth, and are inexpensive relative to our estimate of their future earnings power.

MF: What else stood out for you in regards to HelloFresh?

SG: HelloFresh has carved out an extremely strong market position in a highly profitable niche of the massive global grocery market. HelloFresh entered the fund about 6 months ago.

What attracted me was their market dominance. They’ve got really strong market share and are actually taking further share from competitors while achieving industry-leading margins. In terms of outlook, the grocery market is huge. And HelloFresh still has a very low penetration of households, and they’re only taking a very small percentage of the grocery budget of those households. So they can grow users and they can grow revenues per user in that massive market.

MF: And what else about Netflix looks particularly strong?

SG: Netflix provides a remarkable customer value proposition with access to $15 billion worth of content spend for a $12 monthly subscription. We believe this provides them with substantial scope to grow subscribers and revenue per subscriber over the next 5 to 10 years. Their cost base is largely the fixed cost of content and therefore we expect high incremental margins.

Netflix has been a small position in the fund for a couple of years. We’ve long admired the business model and founder CEO Reed Hastings. After some share price weakness surrounding a period of softer subscriber additions, we took the opportunity to substantially scale up our position in June this year.

MF: Which sectors are you likely to avoid in 2022?  

SG: We avoid sectors where we don’t think we have a good handle on the key long-term value drivers of the businesses. This includes resources, oil and gas, and biotechnology. We have a very strong bias towards simple businesses, ideally offering products we use in our everyday lives, because we believe this limits the unknown unknowns in investing.

We’re also avoiding putting new capital to work in sectors where valuations have gotten ahead of business fundamentals. As an example, we’ve historically had quite large and profitable positions in enterprise software but are increasingly finding these valuations stretched.

MF: If the market closed tomorrow for 5 years, which stock would you want to hold?   

SG: I would say Microsoft Corporation (NASDAQ: MSFT). It’s a business we’ve owned for 2 years and remains the largest position in our fund. When we purchased Microsoft, it was trading at market multiples on near-term forward earnings for a demonstrably better than market business.

Microsoft stands out for the quality of its revenue streams and the diversity of its earnings drivers. It has 2 enormous growth businesses in its Office productivity software and Azure cloud computing service. Both of these benefit from substantial customer lock-in and economies of scale.

On top of that, it owns a cash cow in Windows and a collection of very high-quality, fast-growing smaller businesses including LinkedIn and various gaming assets.

MF: What are your thoughts on Bitcoin (CRYPTO: BTC) and the rise of cryptos in mainstream financial circles? 

SG: We have no investments in Bitcoin or crypto more broadly. There is clearly a huge amount of speculative activity in the space and as students of financial history, it’s hard not to see the parallels here with some of the great manias of the past.

That being said, we do think that it’s important to stay open-minded on new and potentially disruptive technology, particularly from a risk perspective. We are slowly learning about the space and watching to see if real-world applications for crypto emerge so that we can assess the impact this might have on the business models of various listed businesses.

**

If you missed part 1 of our interview with Sam Granger, you can find that here.

(For more information about the Equanimity High Conviction Fund go here.)

The post If markets closed tomorrow for 5 years this is the share to own: fund manager appeared first on The Motley Fool Australia.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Microsoft and Bitcoin. The Motley Fool Australia has recommended Netflix. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Harvey Norman Holdings Limited (ASX: HVN) share price has been out of form in recent months.

Since peaking at a 52-week high of $6.09 in August, the retail giant’s shares have fallen 17% to $5.05.

Is the Harvey Norman share price weakness a buying opportunity?

One leading broker that sees the weakness in the Harvey Norman share price as a buying opportunity is Goldman Sachs.

According to a note this morning, the broker has retained its buy rating and $6.00 price target on the company’s shares. Based on the current Harvey Norman share price, this implies potential upside of almost 19% over the next 12 months.

In addition, the broker is forecasting a 36 cents per share fully franked dividend in FY 2022. This implies a very generous 7.1% yield, bringing the total potential return on offer to 26%.

What did the broker say?

Goldman notes that Harvey Norman has recently released a trading update which revealed positive growth year to date in all regions outside of Malaysia versus the comparable period in 2019.

Overall, the trading update was largely in line with the broker’s expectations, with sales trends in Australia and Europe remaining slightly ahead of expectations and Asia remaining weaker.

Pleasingly, the broker expects this positive form to continue due to favourable trading conditions.

Its analysts commented: “We update our earnings outlook on HVN to reflect the latest trading update. We continue to expect the underlying sales growth vs. pre-COVID levels to remain strong due to the positive housing related spending environment and an overall expected increase in spending for the home category. Additionally, we also update our FX forecasts for HVN, in line with the latest GSe. Overall, this results in a revision of group EBIT outlook by +0.1% and +0.8% respectively over FY22 and FY23e respectively. Our 12m Target Price for HVN remains unchanged at A$6.00 and we maintain a Buy rating on HVN.”

The post Is the Harvey Norman (ASX:HVN) share price dirt cheap? appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro 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 owns shares of and has recommended Harvey Norman Holdings Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Westpac Banking Corp (ASX: WBC) share price will be on watch on Tuesday morning.

This follows the release of an update on its dealings with corporate regulator ASIC.

Why is the Westpac share price on watch?

The Westpac share price will be on watch today after the banking giant announced that it has reached agreement with ASIC to resolve six separate longstanding matters through agreed civil penalty proceedings filed in the Federal Court of Australia.

According to the release, these matters follow regulatory investigations conducted by ASIC, many instigated following the issues being self-reported by Westpac, including some which were raised during the Royal Commission.

Westpac and ASIC will jointly submit agreed proposed penalties for each of the proceedings, totalling $113 million. These penalties are subject to court approval and, positively, have been substantially provisioned (together with anticipated legal costs) in Westpac’s recent FY 2021 results.

What are the matters?

The matters include the provision of incorrect interest rate information provided to debt purchasers, the charging of advice related fees to deceased customer accounts, the incorrect issuing of duplicate general insurance policies without a customer’s consent, inadequate disclosure of adviser fees received for certain super and investment products, and superannuation products offered by BT where customers were inadvertently charged additional advisor commissions.

Westpac notes that the majority of affected customers have been compensated, and any remaining payments will be completed as quickly as possible.

“An important step”

Westpac’s CEO, Peter King, said: “As flagged, we have been working to resolve a number of outstanding regulatory matters before the Bank. We have cooperated with ASIC through the investigations and the process to get to this resolution today.”

“This outcome is an important step forward for us as we continue to fix issues and build stronger risk foundations. In each of these matters, Westpac has fallen short of our standards and the standards our customers expect of us. The issues raised in these matters should not have occurred, and our processes, systems and monitoring should have been better. We are putting things right and unreservedly apologise to our customers,” Mr King added.

The post Westpac (ASX:WBC) share price on watch amid ASIC update appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro owns shares of Westpac Banking Corporation. 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 recommended Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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There are a few key reasons why the Temple & Webster Group Ltd (ASX: TPW) share price could be a compelling ASX stock.

For the readers that haven’t heard of Temple & Webster before, it’s like the Amazon of Aussie furniture and furnishings, selling hundreds of thousands of products like home furniture, lighting, kitchen and table items, rugs, outdoor items and so on.

Plenty of analysts rate the business as a buy, including Morgan Stanley. The price target on Temple & Webster – where the broker thinks the Temple & Webster share price will be in a year – is $16. That’s almost 50% higher than today’s level.

Here are three important reasons why it’s an interesting potential opportunity:

Revenue growth and market position

Morgan Stanley says that it is possible that Temple & Webster can reach revenue of $1 billion in the next five or so years.

Temple & Webster is certainly taking large strides towards that number. In FY21 alone it saw revenue growth of 85% to $326.3 million. FY22 has seen a continuing of a high level of double digit growth. For the period of 1 July 2021 to 27 August 2021, revenue had increased by 49%.

Management say that the business will continue its reinvestment strategy, investing into growth areas of the business to grow its online market leadership position with the ultimate goal of becoming the largest retailer (online and offline) for furniture and homewares in the home market.

Temple & Webster is focused on strengthening its customer proposition, built around “having the biggest and best range of furniture and homewares, combined with inspirational content and a great customer service experience.”

Growth of its private label brand products is helping provide diversification of supply, improved margins, stock assurance and a quicker speed of dispatch.

Online shopping adoption

The online retailer says that it has a large addressable market with accelerating online adoption. Temple & Webster says that it is operating in a large $16 billion market (which excludes business to business), with less than 9% of that sold online. The growth of spending online could help the Temple & Webster share price over time.

Temple & Webster is seeing its customer numbers continue to rise quickly, In FY21, active customers rose 62% year on year.

The business expects to take a good proportion of customers turning to online retail, by executing on both its organic and ‘inorganic’ opportunities.

Millennials are now entering the core demographic of spending, which is between the ages of 35 to 65.

There are a number of other factors that can help growth including physical store closures, new consumer habits formed during COVID-19 lockdowns, new market entrants (like Amazon) speeding up e-commerce take-up and new technologies improving the experience and conversion of shopping online.

Operating model

Another factor that can assist the Temple & Webster share price over time could be its business model.

Increasing scale helps its operating leverage, allowing it to accelerate investment for future growth and take market share, which then continues that positive cycle. Better unit economics help the underlying profitability as it gets bigger. As it gets bigger, it can slow its investment in fixed costs.

Temple & Webster says that it has a capital light and cashflow positive business model. Around 74% of its sales are through a drop-ship model with suppliers, meaning there is no inventory risk. The company is also able to leverage third party warehouses and carrier networks. This gives the business leverage to fund re-investment activity to outgrow the market.

Over the longer-term, the business sees international expansion as the next horizon of growth.

The post 3 key reasons why the Temple & Webster (ASX:TPW) share price is compelling 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. owns shares of and has recommended Temple & Webster Group Ltd. The Motley Fool Australia has recommended Temple & Webster Group Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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