I often focus on Morgan Stanley's research as its research department is one of the more conservative out of the major brokerage houses (UBS is the worst, consistently bullish).
Anyway here is the summary: Price target: $1.70 Yes thats right $1.70
David Jones earnings are rebasing following years of cost out and underinvestment – this could be a painful experience for investors, in our view. We aren’t convinced it will be an online winner despite its ambitions. We retain an Underweight rating.
EPS Estimates: 2012: 0.2 2013: 0.19 2014: 0.16
DPS: 2012: 0.17 2013: 0.16 2014: 0.14
Collectively the department stores are embarking upon a strategy of aggressive store rollout. We hold concerns over the ability to do this profitably as consumers spend more online. • Department stores are typically low growth retailers that are a laggard of retail trends. • After years of cost out, reinvestment is now occurring which is leading to a rebasing of profits • The internet is a real threat to Australian-based high margin retailers like DJS
David Jones significant profit warning highlights to us that cost out has gone too far and exposes underinvestment in the business over many years. We think that it will take years for its earnings to rebase – so we cannot recommend its shares. While we like its initiatives to invest in service and the online channel, realistically, it will be some time before this investment bears fruit. To us online ‘winners’ tend to be retailers that own brands, rather than just distribute product, so we can’t see DJS executing a value enhancing strategy online. The company has also given its competitors (huge global players) a significant head start and the capital investment budget for online does not look to be enough. Valuation looks stretched as stable financial services profits collapse to put the stock on an F2014 P/E of 15x, the most expensive in the sector. We retain an UW rating.
DJS Price at posting:
$2.39 Sentiment: None Disclosure: Not Held
