Tag: Motley Fool Australia

We all knew the Australian retail numbers for April 2020 would be bad. The coronavirus pandemic and subsequent economic shutdowns have literally closed thousands of shops and businesses around the country since March. For a few weeks, many Australians weren’t allowed to step foot into shopping centres.

But it’s always sobering when reality replaces the hypothetical and that’s just what has happened today.

This morning, the Australian Bureau of Statistics (ABS) released its official retail data for the month of April and the numbers weren’t too good.

A gloomy month for Aussie retail

According to the ABS, Australian retail turnover fell 17.9% in April 2020. That number is seasonally adjusted too and it’s the largest fall ever recorded by the ABS. Compared with April 2019, Aussie retail turnover was down 9.4%.

The ABS reports that every single industry reported falls, with food retailing; cafés and restaurants and clothing, footwear and personal accessories sectors hit the hardest. Turnover in these sectors was “around half the level of April 2019.”

Particularly of note was food retailing, which fell 17.1% in April following a strong rise in March. It appears consumers have stopped buying/hoarding record amounts of non-perishable food and household essentials that we saw in March when the extent of the coronavirus became apparent.

What do these numbers mean for ASX shares?

Unfortunately, there’s not a lot of good news for ASX investors in these numbers. Of course, most of us were expecting extremely dire numbers for April, but seeing them in the flesh isn’t a fun exercise, especially for anyone holding shares of retail-exposed companies, especially for shopping centre REITs like Scentre Group (ASX: SCG).

It’s not good news for shareholders of Coles Group Ltd (ASX: COL) or Woolworths Group Ltd (ASX: WOW), either. It shows that the panic buying that we saw in March was a ‘flash in the pan’ kind of scenario, and I don’t expect the new trends that we see in April to reverse for Coles and Woolies for the rest of the year.

I would suggest keeping on eye on the figures for May and June (once they’re released) for a clearer indication of what the future holds. April’s numbers were always going to be bad because consumers legally had to stay at home unless buying essentials. But it’s the figures that detail how Australians are shopping when we actually have the freedom of doing so that will really paint the picture of what the rest of 2020 has in store.

More reading

• Down 10% in 2 months. Are Coles shares a buy today?
• The Bubs share price is up 20% in May, will it catch up to the A2 Milk share price?
• 3 ASX shares that will have strong dividends in 2020
• 3 ASX 200 blue chip shares I would buy today
• 2 ASX 50 shares for retirees to buy right now

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. The Motley Fool Australia has recommended Scentre Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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According to research by Fidelity, as of the end of 2019, the S&P/ASX 200 Index (ASX: XJO) had generated an average total return of 9.2% per annum over the last three decades.

While the current decade has got off to a bad start, I expect the share market to rebound and generate a similarly strong return over the next 10 years.

But you don’t have to settle for the market return. I believe there are a large number of quality shares on the local share market with the potential to outperform the market.

As a result, if you are able to make regular investments into their shares over the period, you could end up with a small fortune.

For example, a $2,500 annual investment for 10 years into a share earning a total return of 11.7% per annum (2.5% greater than the market average) would grow into just under $50,000.

Of course, the more you invest, the greater the potential return. If you can afford to invest $3,000 each year, your investments would be nearing $60,000 after 10 years. If you can put $10,000 in, you’re looking at almost $200,000.

But which shares could beat the market over the next 10 years? Three that I think have the potential to be market beaters are listed below:

Appen Ltd (ASX: APX)

The first option to consider is Appen. As a leading developer of high-quality, human annotated datasets, its looks exceptionally well-positioned to benefit from the machine learning and artificial intelligence (AI) boom. Especially given its leadership position in the industry and its relationships with some of the world’s biggest tech companies. I expect demand to grow over the next decade and underpin strong earnings growth.

Kogan.com Ltd (ASX: KGN)

Another option to consider is Kogan. It is a growing ecommerce company which looks well-positioned for long term growth thanks to the shift to online shopping. At present approximately 10% of all retail spending is made online. I expect this to increase over the next decade and for Kogan to continue growing its market share and ultimately its earnings.

ResMed Inc. (ASX: RMD)

Finally, I think this sleep treatment-focused medical device company’s shares could be market-beaters over the next decade. This is due to its industry-leading products and massive market opportunity. Management estimates that there are 1 billion people impacted by sleep apnoea worldwide. But with only ~20% of these sufferers being diagnosed, it should have a long runway for growth. 

More reading

• Why AP Eagers, Lendlease, Pushpay, & ResMed shares are sinking lower
• 3 ASX 200 healthcare shares I’d buy today
• How you can get very rich with ASX 200 shares
• 2 millionaire-maker ASX internet growth shares
• Where to invest $500 in ASX shares right now

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Kogan.com ltd. The Motley Fool Australia owns shares of Appen Ltd. The Motley Fool Australia has recommended ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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The Bubs Australia Ltd (ASX: BUB) share price has outperformed the A2 Milk Company Ltd (ASX: A2M) in May by soaring more than 20%. 

Much of Bubs recent share price success can be attributed to its announcement of a new major supply agreement with Coles Group Ltd (ASX: COL) and other domestic retailers. This agreement means Bubs Organic Grass Fed Infant Formula will be on the shelves of more than 480 Coles supermarkets from June 2020, complementing existing products in its Goat Milk Infant formula and Organic Toddler snacks. Other retailers to join Coles in selling Bubs products in-store include Baby Bunting Group Ltd (ASX: BBN) and Woolworths Group Ltd (ASX: WOW). 

Bubs have also expanded their product range to include an organic cow milk formula which will see them cater to a market larger than goat’s milk by moving into the cow’s milk segment which accounts for over 90% of the Australian formula market. 

Bubs half-year result 

The Bubs share price showed it wasn’t impressed with the company’s half-year results released in February. The results may have missed expectations, or the timing of the report may have coincided with the initial outbreak of the coronavirus epidemic and consequent market sell-off. 

The company outlined a 39% increase in net revenue and a significant 24% increase in its gross margins. Its EBITDA loss slightly worsened due to a 269% increase in marketing and promotional costs to support its domestic presence and building brand awareness in China. This is reminiscent of A2 Milk’s significant increase and investment in marketing in its FY19 full-year report. In its 1H20 report, it commented that the increased levels of investment in marketing and capability development translated into accelerated growth in its China label business. 

A strong driver of its growth has been the sales of Bubs’ Goat Infant Formula which grew 77% on the prior corresponding period. Other revenue streams showed moderate growth with its Organic Baby Food growing 23% and Adult Goat Milk Powder increasing 30%. Its fresh milk and yoghurt products looked to struggle the most, falling 49%. 

Foolish takeaway 

Bubs are securing the right partnerships and making worthwhile investments to strengthen its brand, however, while it is making all the right moves, given the fact that it is not yet a cash-generating business I wouldn’t consider it a ‘safe’ investment. All things considered, though, down the track Bubs could prove a worthy buy for the medium to long term. 

More reading

• 2 ASX shares in the firing line of trade tensions with China
• 3 stellar ASX growth shares to buy right now
• 3 ASX shares that will have strong dividends in 2020
• 3 ASX 200 blue chip shares I would buy today
• 2 ASX 50 shares for retirees to buy right now

Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of BUBS AUST FPO. The Motley Fool Australia owns shares of A2 Milk, COLESGROUP DEF SET, and Woolworths Limited. The Motley Fool Australia has recommended BUBS AUST FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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The Aristocrat Leisure Limited (ASX: ALL) share price is rallying ahead of its first half profit results tomorrow.

Investors are anticipating good news as shares in the gaming machine maker jumped 1.5% to $27.21 during lunch time trade when the S&P/ASX 200 Index (Index:^AXJO) inched up 0.4%.

But there’s still room to climb as I believe management will unveil results that will justify Aristocrat being a $30+ stock.

Growing despite COVID-19

Brokers like Citigroup believe it can deliver double digit earnings growth despite the COVID-19 shutdown that forced casinos like Crown Resorts Ltd (ASX: CWN) and Star Entertainment Group Ltd (ASX: SGR) to close.

“We expect strong growth in Digital and Americas in AUD terms to offset declines in ANZ and International Class III,” said Citigroup.

“No dividend will be declared to shore up liquidity; and the focus will be on the outlook for 2H20e given the gradual reopening of casinos underway in the US and the expected reopening of Australian customers in 4Q20e.”

Focus on digital, not dividend

I doubt the market will be disappointed if Aristocrat canned its interim dividend. It’s a similar case with building materials supplier James Hardie Industries plc (ASX: JHX) where the main reason investors buy these stocks is for their growth potential and not skinny dividends.

The thing to watch closely when Aristocrat releases its results is growth in its digital (social gaming) division. This is likely to be the group’s main growth engine going forward.

Mobile gaming apps were gaining strong traction before coronavirus struck. Measures undertaken around the world to keep people at home to prevent the spread of the disease meant even more are likely to embrace the distraction.

Brightening outlook

Having said that, its traditional land-based business (poker machines) could also have turned a corner as its key US market is easing restrictions.

There is a real danger of a second wave of infections in the US. But looking at attitudes towards the virus in that country, I am not sure if even that will be enough to force states into draconian lockdowns.

Key picks in industrials sector

While there are potential challenges waiting in the wings for Aristocrat, the risk-reward equation justifies the stock as a buy.

Aristocrat is one of my key holdings in the industrials sector, along with James Hardie and glove maker Ansell Limited (ASX: ANN).

More reading

• Can we value ASX shares with P/E ratios in 2020?
• Why this ASX funeral share is well positioned for future growth
• ASX 200 down 0.2%: Big four banks lower and TPG announces demerger plans
• Positive signs for Australia’s jobs market as ABS data points to a recovery
• Is the Newcrest Mining share price in the buy zone?

Motley Fool contributor BrenLau owns shares of Aristocrat Leisure Ltd., Ansell Limited and James Hardie Industries plc. The Motley Fool Australia has recommended Ansell Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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Are you a fan of small cap tech shares? If you are then you’re in luck because there are a good number trading on the ASX right now which I believe have a lot of potential.

Three which I feel would be worth keeping a close eye on are listed below. Here’s why I think they could be stars of the future:

Audinate Group Limited (ASX: AD8)

The first small cap to watch is Audinate. It is a digital audio-visual networking technologies provider that has been growing at a very strong rate in recent years. This has been driven by the increasing demand for its innovative Dante product. This award-winning audio over IP networking solution is being used widely across the professional live sound, commercial installation, broadcast, and recording industries globally. The company also has its eyes on the lucrative Audio & Video (AV) market. If it can dominate this market as well, it could be destined for big things.

ELMO Software Ltd (ASX: ELO)

ELMO is a cloud-based human resources and payroll software company. It provides users with a unified platform that streamlines processes such as recruitment, on-boarding, learning, and payroll. Its platform has been growing in popularity over the last few years thanks to increasing demand and its high retention rate. This has led to ELMO growing its recurring revenues and earnings at a very strong rate. The good news is that it still has a massive addressable opportunity in the ANZ market and the potential to expand globally.

Whispir (ASX: WSP)

A final small cap to watch is Whispir. It is a software-as-a-service communications workflow platform provider. This platform allows companies to deliver actionable two-way interactions at scale using automated multi-channel communication workflows. This helps make operations more efficient and can cut down the number of service desk support calls. I feel a testament to the quality of its offering is it blue chip customer base which includes AGL Energy Limited (ASX: AGL), Foxtel, and Disney.

More reading

• These small cap ASX shares could be stars of the future
• Could these small cap ASX shares be the next Afterpay?
• Why Altium, ELMO, Suncorp, & Webjet shares are sinking lower
• 3 ASX tech shares to buy now for long-term returns
• Leading brokers name 3 ASX shares to buy today

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Elmo Software. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Whispir Ltd. The Motley Fool Australia owns shares of and has recommended AUDINATEGL FPO. The Motley Fool Australia has recommended Elmo Software and Whispir Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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Many of Australia’s top brokers have been busy adjusting their financial models again, leading to the release of a large number of broker notes this week.

Three broker buy ratings that have caught my eye are summarised below. Here’s why brokers think these shares are in the buy zone:

Costa Group Holdings Ltd (ASX: CGC)

Analysts at UBS have retained their buy rating and $3.25 price target on this horticulture company’s shares. According to the note, the broker expects Costa to provide investors with a positive update at its annual general meeting next week. It feels current trading conditions support its earnings forecasts and there could even be upside risk to them if weather conditions and foreign exchange remain favourable. I think UBS makes some great points, but I would suggest you wait for the update before making a move.

IDP Education Ltd (ASX: IEL)

A note out of Goldman Sachs reveals that its analysts have retained their buy rating and trimmed the price target on IDP Education’s shares slightly to $18.00. According to the note, the broker expects volumes to remain constrained across both its student placement and English language testing businesses in the second half of FY 2020 and the first half of FY 2021. However, it is very positive on its long term prospects and has forecast a big rebound in earnings in FY 2022. I agree with Goldman Sachs and would be a buyer of its shares.

Newcrest Mining Limited (ASX: NCM)

According to a note out of Citi, its analysts have retained their buy rating and lifted the price target on this gold miner’s shares to $35.00. Citi lifted its price target on the belief that the gold price will be stronger than expectations over the long term. It feels this will be supportive of Newcrest’s shares. While I think Citi is spot on and Newcrest is quality miner, I think there are better value option in the industry.

More reading

• Is the Newcrest Mining share price in the buy zone?
• 3 shares now trading at crazy cheap prices
• 5 things to watch on the ASX 200 on Tuesday
• ASX 200 up 1.35%: Gold miners and Fortescue rocket higher, big four banks tumble
• Meet the ASX 200 company that just posted a 90% surge in profit

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Idp Education Pty Ltd. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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This morning, home builder and building products company Fletcher Building Limited (ASX: FBU) provided a market update on trading conditions in the wake of COVID-19.

The Fletcher Building share price is down more than 3% at the time of writing, however, its commentary on the outlook for the Australian building market may be of more interest to many investors.

For those unfamiliar with the company, Fletcher Building is an S&P/ASX 200 Index (ASX: XJO) share that operates across the entire building supply chain – from raw materials right through to construction. It’s headquartered in New Zealand and is dual-listed on the NZX.

What did Fletcher Building announce?

This morning, Fletcher Building disclosed that it generated virtually zero revenue from its New Zealand operations during the country’s level 4 restrictions. These restrictions began in late March and remained in place through to late April. On a more positive note, revenue from its Australian business ran at around 90% of pre-COVID-19 expectations.

While Australia at least managed to break even, Fletcher Building’s New Zealand operations reported an operating earnings before interest and tax loss of NZ$55 million for April.

Since New Zealand made the move to level 3 on 28 April, conditions have been improving. The company’s New Zealand businesses are trading at around 80% of forecasted revenues in May. Australia continues to trade at around 90% of pre-COVID-19 expectations.

Bracing for impact

Commenting on COVID-19 and its impact on Fletcher Building’s markets in New Zealand and Australia, CEO Ross Taylor said:

While there is a lot of uncertainty over the economic outlook, we expect COVID-19 will lead to a sharp downturn in FY21 and potentially beyond. Looking to the next financial year, we are planning for an environment that will see a shrinking economy, substantially reduced customer demand across all our businesses and sustained lower levels of productivity.

As a result, the company will look to reduce its workforce by approximately 10% – around 1,000 positions in New Zealand and 500 in Australia – in order to get ahead of the anticipated slump in construction activity.

According to Mr Taylor, prior to COVID-19, residential approvals in Australia had been showing signs of renewed growth from a base of around 150,000. However, the company now expects approvals to fall by a further 15% to 129,000 in FY20.

In addition, Fletcher Building is factoring in a 15% decline in the value of commercial work put in place in FY21 due to a reduced project pipeline in the private sector. Meanwhile, it also expects a 10% drop in infrastructure spending as new projects take time to ramp-up.

What does this mean for ASX construction shares?

On the whole, Fletcher Building’s market outlook certainly paints a bleak picture of the near-term state of our economy and housing market. It’s also a warning to other ASX construction and building products shares like Boral Limited (ASX: BLD), CSR Limited (ASX: CSR), and Adelaide Brighton Ltd (ASX: ABC).

Recently, Boral reported subdued concrete volumes and revenue for the 4 months ended April 2020. Meanwhile, CSR released its full-year FY19 results last week and assured investors it is monitoring lead indicators to allow for an adjustment in production and cost profile as early as possible. 

In any case, a shrinking economy and significant pullback in construction activity will put pressure on the share prices of ASX construction shares until the sector shows sustained signs of improvement.

Fletcher Building’s decision to reduce its workforce also serves as a reminder that while thousands of jobs were saved at the height of the pandemic, they can still be lost during the recovery phase.

More reading

• 5 ASX 200 dividend shares for an economic recovery
• This is the latest ASX 200 stock to unveil double digit profit growth
• 4 ASX 200 shares exposed to a fall in house prices
• ASX 200 finishes up 1.4%, gold miner share prices surge
• Why Boral, Corporate Travel Management, United Malt, & Xero are dropping lower

Motley Fool contributor Cathryn Goh has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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The TPG Telecom Ltd (ASX: TPM) share price has been a strong performer on the S&P/ASX 200 Index (ASX: XJO) on Wednesday.

In afternoon trade the telco’s shares are up 5% to $7.64 following the release of its merger scheme booklet.

What did TPG Telecom announce?

Late on Tuesday TPG released its scheme booklet for the proposed merger with Vodafone Australia. This follows the receipt of FIRB approval earlier this month.

Should the merger be approved an implemented, TPG shareholders will own 49.9% of the merged company, with Vodafone Australia shareholders owning the remaining 50.1%.

TPG shareholders will also receive a dividend if the merger goes ahead. The company’s board revealed that it intends to pay a fully franked cash special dividend prior to the implementation of the scheme for those that hold shares on the special dividend record date.

At this point the amount of the dividend and the record date are unknown. But further details will be released at least 10 days prior to the scheme meeting on June 24.

A note out of Goldman Sachs today reveals that its analysts believe the dividend could be as high as 67 cents per share.

They commented: “Based on our current FY20E Net Debt estimate of A$1,688mn for TPM and the previously published estimate of $200mn in Singapore funding/Transaction costs, we calculate TPM would have capacity for up to a 67c fully franked potential special dividend (A$813mn franking credits at FY19).”

Demerger plans.

TPG also advised that it intends to undertake a separation of its Singapore business. This will see the business listed on the ASX under the name Tuas Limited and with the ASX ticker code “TUA”.

The company explained that all of the shares of Tuas Limited will be distributed to TPG shareholders. Further details on this separation will be despatched to shareholders on or around May 25.

Should you invest?

While I still have a preference for rival Telstra Corporation Ltd (ASX: TLS) at current prices, I do think this merger makes TPG Telecom a force in the industry and an interesting option for investors.

The special dividend certainly will be a nice bonus for shareholders, but it is unclear at this stage just what it will pay. In light of this, I wouldn’t rush in purely for that until more is known.

More reading

• ASX 200 down 0.2%: Big four banks lower and TPG announces demerger plans
• 3 safe and strong ASX dividend shares to buy right now
• Macquarie picks the best stocks to buy for the post COVID-19 rebound
• 2 ASX 50 shares for retirees to buy right now
• 2 ASX shares I would buy for growth and income

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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The Altium Limited (ASX: ALU) and Xero Limited (ASX: XRO) share prices both experienced falls following the release of their business updates. Despite both having partially rebounded since then, they are still trading below their pre-market update prices. Given the strong historic share price performance of these 2 market darlings, could this sell off still represent an opportunity to buy for the long term? 

Altium business update 

In Altium’s most recent business update on 12 May, the company’s CEO Aram Mirkazemi commented:

As the governments of the US and Western Europe continue to wrestle with containing the virus, we believe that the prolongation of restrictions is likely to impact Altium during May and June. While engineers are actively doing prototype designs, and the electronics industry is holding up relatively well, the cash preservation priorities of small to medium size businesses are likely to affect the timing of closing sales in our typically strongest months of the year being May and especially June.

The update also went on to state that Altium is highly unlikely to achieve its long-term aspirational goal of US$200 million revenue for the full year. 

So is the Altium share price in the buy zone?

Following this disappointing yet not entirely unexpected news, the Altium share price fell a little over 5% last week before rebounding this week to close the gap to only 3% lower than its pre-market update price. Its market darling status allowed the company to avoid what could have otherwise been a more significant sell off.

The key risks facing prospective Altium investors are the company’s current expensive valuation and the unknowns regarding its May and June performance. I would personally avoid Altium shares at this point in time and wait for more concrete information regarding how it fares over the coming months. Having said that, I also believe its high profile market status could result in investors largely ignoring the company’s short-term headwinds. This may allow Altium’s share price to remain more stable during this volatile period. 

Xero’s full year earnings 

At face value, Xero delivered a strong full year result that highlighted a 30% increase in operating revenue, a 26% increase in subscribers and a maiden net profit of NZ$3.3 million. However, the company outlined the difficult times ahead for many of its clients due to the ongoing economic fallout of the coronavirus pandemic. 

Xero noted that March trading resulted in some reduction in annualised monthly recurring revenue as many of its small business customers were hit hard by COVID-19 restrictions. That said, many other fintech companies such as Afterpay Ltd (ASX: APT) and Tyro Payments Ltd (ASX: TYR) also witnessed sales and transaction values trough in March, before rebounding in April. 

Is the current Xero share price in the buy zone?

There are plenty of growth avenues and areas of planned strategic investment to support Xero’s continued success over the long term. This was outlined in its full year presentation, with key areas of strategic focus including driving cloud accounting, expanding its small business platform and building the company for global scale and innovation.

Personally, I believe its future opportunities and global expansion still make Xero an appealing long-term investment, despite its current, eye-watering valuation. 

More reading

• 3 fantastic ASX shares to buy now to get rich later
• Should you throw $3,000 into Altium shares today?
• Are Xero shares a top long-term buy?
• 2 millionaire-maker ASX internet growth shares
• Where to invest $500 in ASX shares right now

Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Tyro Payments and Xero. The Motley Fool Australia owns shares of AFTERPAY T FPO and Altium. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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ASX share prices have been hit hard in 2020, and we’ve seen price to earnings (P/E) ratios plummet. The P/E ratio is a classic metric used by investors around the world to judge the relative value of different shares. But in the current climate, does the ratio tell us anything about ASX shares?

What is the price to earnings ratio?

As the name suggests, a P/E ratio is calculated by dividing a company’s share price by its earnings per share (EPS). EPS can be measured as either a trailing EPS (from the last reporting period) or a forward EPS (projected for the next reporting period). Depending on which of these is used in the denominator, we can derive either a forward P/E or trailing P/E.

Do P/E ratios tell us anything about ASX shares in 2020?

Now, ASX share prices have been hammered in 2020 which means the ‘P’ in the ratio is falling lower. On top of that, earnings look set to slump in the wake of the coronavirus pandemic and subsequent economic shutdown.

This means it’s logical that P/E ratios for ASX shares are falling across the board. This is particularly the case in the hardest-hit sectors like media and travel.

For instance, the Southern Cross Media Group Ltd (ASX: SXL) shares are trading at just 3.38 times earnings. Similarly, Flight Centre Travel Group Ltd (ASX: FLT) trades at a P/E ratio of 6.10. Webjet Limited (ASX: WEB) is trading at 15.61 times earnings which, whilst higher than Southern Cross and Flight Centre, is still lower than the S&P/ASX 200 Index (ASX: XJO) average.

Under normal circumstances, this would suggest that all three of these ASX dividend shares could be great value buys. However, thanks to COVID-19, I think the earnings component (E) will be slashed lower in 2020. The pandemic response has reduced earnings for many of these groups to a trickle of what they were in 2019. That means that P/E ratios (and dividend yields) may not help you to value your favourite ASX shares right now.

In other words, because P/E ratios are often a lagging indicator, valuing shares like Webjet, Flight Centre and Southern Cross based on this metric can be misleading. 

So… how should we value ASX shares?

If we can’t rely on P/E ratios right now, what’s the alternative? 

One quantitative option is to look at the balance sheet strength of companies instead of earnings. Low levels of debt and a strong asset base could pay dividends in the current climate. Companies with a combination of these two things are in a more stable position with less strain on their finances from other parties, like banks.

Another option is to sit tight and wait for the August earnings season. This will provide a better idea of expected and actual earnings, but it would mean staying out of the market for 3.5 months. 

Foolish takeaway

P/E ratios can be misleading at the moment, but that doesn’t make them useless. Some companies’ earnings will remain steady despite COVID-19 but I’d be treading lightly when valuing ASX shares in this market.

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Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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