SGOCO Group Ltd (NASDAQ:SGOC), a USD$10.94M small-cap, is a consumer discretionary company operating in an industry, whose performance is predominantly driven by consumer confidence, which is linked to employment and wage rates. Purchasing power is also a factor of interest rates and lending standards by financial institutions. These macro elements determine how fast, and how often, consumers buy big-ticket durable items. The industry also faces a very competitive environment, with further pressure on margins from changes customer preferences, including the continued rise in online sales. Consumer discretionary analysts are forecasting for the entire industry, a positive double-digit growth of 13 percent in the upcoming year, and a whopping growth of 34 percent over the next couple of years. This rate is larger than the growth rate of the Australian stock market as a whole. An interesting question to explore is whether we can we benefit from entering into the household durables sector right now. In this article, I’ll take you through the sector growth expectations, and also determine whether SGOC is a laggard or leader relative to its consumer discretionary sector peers. Check out our latest analysis for SGOCO Group
What’s the catalyst for SGOC'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 endured negative growth of 0 percent, underperforming the Australian market growth of 6 percent. SGOC lags the pack with its negative growth rate of -24 percent over the past year, which indicates the company will be growing at a slower pace than its household durables peers. As the company trails the rest of the industry in terms of growth, SGOC may also be a cheaper stock relative to its peers.
Is SGOC and the sector relatively cheap?
Household durables companies are typically trading at a PE of 21 times, relatively similar to the rest of the Australian stock market PE of 22 times. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a higher 24 percent compared to the market’s 16 percent, potentially illustrative of past tailwinds. Since SGOC’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge SGOC’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? SGOC has been a household durables industry laggard in the past year. If your initial investment thesis is around the growth prospects of SGOC, there are other household durables companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how SGOC fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If SGOC has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its household durables peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at SGOC’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into SGOCO Group's stock, take a look at the company's latest free analysis report to find out more on its financial health and other fundamentals. Interested in other consumer discretionary stocks instead? Use our free playform to see my list of over 100 other consumer discretionary companies trading on the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.