With interest rates falling, many investors are understandably wondering whether consumer-focused companies are worth buying. After all, the RBA seems intent on maintaining a very loose monetary policy and, looking ahead, it seems likely that interest rates will fall below 2% over the medium term.
That's made even more probable by the fact that there is a lag between a decision to reduce rates and their impact on the economy, and so even the recent 0.25% cut may not have an impact until early next year. As such, the economy may continue to face uncertain performance in the months ahead.
However, over the medium term, a lower interest rate usually provides consumers with greater confidence and makes purchasing on credit significantly cheaper. As such, the sector could see top lines, bottom lines and investor sentiment pick up. Are these three stocks a sound means for you to benefit?
Woolworths Limited
Earnings forecasts for Woolworths Limited (ASX: WOW) are not particularly upbeat, with an increasing focus on price by supermarket shoppers meaning that the company's bottom line is expected to decline at an annualised rate of 1.5% during the next two years.
However, its price to sales (P/S) ratio remains relatively low, with it standing at just 0.57 versus 0.71 for the wider food and staples retailing sector and 1.63 for the ASX. And, with a beta of just 0.67, Woolworths offers a relatively stable and robust shareholder experience, with its yield of 4.9% providing a great income to go alongside the potential for an upward rerating.
Wesfarmers Ltd
A major appeal of Wesfarmers Ltd (ASX: WES) is its conglomerate structure. So, while Woolworths may be struggling to post earnings growth due to challenges in the supermarket sector, Wesfarmers is shielded to an extent by its exposure to other sectors.
Evidence of the positive impact of this diversity on the company's top line can be seen in the fact that Wesfarmers has increased its sales at an annualised rate of 11.3% during the last ten years. And, while Wesfarmers does trade at a premium to both the wider index and its sector (it has a price to earnings (P/E) ratio of 20.4 versus 17.2 for the ASX and 17.3 for its sector) its stability and robust business model make it an appealing consumer-focused play.
Super Retail Group Ltd
Although Super Retail Group Ltd (ASX: SUL) trades at a premium to the ASX, its track record of earnings growth makes it worthy of a P/E ratio of 20.3. In fact, during the last ten years the seller of auto parts, outdoor equipment and sports goods has increased its bottom line at an annualised rate of 15%. And it is set to rise by 8% in each of the next two years.
Of course, Super Retail's recent trading update highlighted that margins have come under pressure, but the market appears to be backing the company after its shares have risen by 49% since the turn of the year. And, with a payout ratio of 70%, its dividend yield of 3.6% looks sustainable.
