MARKETS SPECTATOR: Time to go shopping?

RBS Morgans thinks consumer stocks like Myer, Harvey Norman and David Jones are looking like a good deal.

Despite some retail names plumbing record lows, RBS Morgans has turned bullish on the consumer discretionary sector.

"We move our sector call on Consumer Discretionary to Overweight. The household income pool has grown in FY13 thanks to monetary and fiscal policy, far outweighing cost-of-living increases. Stabilising house prices should be the key to improving consumer sentiment, the critical link to higher spending”, RBS said.

Subsequently, the broker has upgraded both Myer (MYR) and Harvey Norman (HVN) to outperform from neutral and David Jones (DJS) to neutral from underperform.

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Source - Iress

RBS thinks that improved spending by consumers is one the cards, and Myer will be a beneficiary. "Improved trading momentum in discretionary categories, particularly apparel, should see Myer outperform in the medium term. The stock’s current discount to peers is excessive in our view, particularly in light of relative earnings momentum”, the broker noted.

After upgrading net profit after tax forecasts, the broker has lifted its price target to $2.10 from $1.90 and said Myer offers cheap, low-risk exposure to an anticipated modest improvement in discretionary spending.

Regarding Harvey Norman, RBS believes Harvey Norman provides high leverage to the cycle, with momentum to build from the second quarter 2013.

"The company’s franchise structure and high marketing spend (through the cycle) result in a higher-than-average proportion of fixed costs, and therefore higher earnings leverage. While the electronics category has lagged in recovery thus far, this largely reflects withheld demand ahead of new technology releases”, RBS said. It upgraded the retailers target to $2.00 from $1.90.

As for David Jones, RBS has upgraded its rating, but sees better options available. "Improved underlying trading conditions should help gross profit margin recovery and partially offset higher ‘transition costs’ in 1H13. Nonetheless, the prospect of earnings growth on a three-year view is low, something not reflected in the current multiple”, RBS said.

RBS thinks that DJs has the potential to rise to $2.25 a share from their previous target price $1.92 but that is fully dependent on a cyclical recovery. David Jones is trading at a premium to its peers and as a result has more downside potential that Myer or Harvey Norman.

This is an amended version of the article. The article previously stated the David Jones share price at a current price of $1.92. It should have said $1.92 was the target price from RBS' previous forecast.

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