In This Article:
Waterco Limited (ASX:WAT), a AU$74.57M small-cap, operates in the consumer discretionary industry, whose sales are driven primarily by consumer sentiment and access to capital. These macro factors tend to determine the rate at which consumers purchase leisure products. Consumer discretionary analysts are forecasting for the entire industry, a positive double-digit growth of 23.36% in the upcoming year , and a robust short-term growth of 11.17% over the next couple of years. However, this rate came in below the growth rate of the Australian stock market as a whole. Below, I will examine the sector growth prospects, as well as evaluate whether Waterco is lagging or leading in the industry. View our latest analysis for Waterco
What’s the catalyst for Waterco’s sector growth?
E-retailing is expected to remain the fastest growing sales channel, shifting the retail landscape. Significant number of retail store closures and bankruptcies were an indication of both changing consumer preferences and rising online competition. In the previous year, the industry saw growth in the teens, beating the Australian market growth of 6.96%. Waterco leads the pack with its impressive earnings growth of 28.00% over the past year. This proven growth may make Waterco a more expensive stock relative to its peers.
Is Waterco and the sector relatively cheap?
The leisure sector’s PE is currently hovering around 21.61x, relatively similar to the rest of the Australian stock market PE of 17.23x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. Furthermore, the industry returned a similar 10.34% on equities compared to the market’s 11.27%. On the stock-level, Waterco is trading at a PE ratio of 20.67x, which is relatively in-line with the average leisure stock. In terms of returns, Waterco generated 5.76% in the past year, which is 4.58% below the leisure sector.
Next Steps:
Waterco recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders, and the stock is currently trading in-line with its peers. If the stock has been on your watchlist for a while, now may be the time to buy. If you like its proven ability to generate growth, you’ll be paying a fair value for the company. However, if you’re hoping to gain from an undervalued mispricing, this is probably not the best opportunity. However, before you make a decision on the stock, I suggest you look at Waterco’s fundamentals in order to build a holistic investment thesis.