Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 303

Two value opportunities in domestic cyclicals

It looks clear that 2019 will be a challenging year for the consumer. The daily headlines on falling house prices, declining car sales, tightening credit, election uncertainty and regulatory changes are having a reinforcing loop. As always, but particularly in such an environment, we’ve looked to tilt the portfolio away from poorly-positioned consumer-exposed stocks. What does poorly positioned mean? Companies that sell goods and services that are easily interchangeable or are in a highly competitive industry.

An example of a company that is not poorly positioned is Bunnings (owned by Wesfarmers) – sure, sales growth is slowing but it dominates the hardware segment in Australia and will be untouched by disruption, either technological or regulatory.

The balance to this view, though, is that a lot of consumer-facing stocks are looking attractively priced – sometimes up to a 50% valuation discount to the broader market averages. So there are opportunities. Analysing industry structure is how we identify those businesses that should be more resilient in a weaker domestic economy.

oOh!Media

One such opportunity is oOh!Media, an outdoor advertising company. The stock has sold off on concerns around advertising spending, which are cyclical and consumer-sentiment driven. However, the outdoor media industry is taking a larger share of the broader advertising market, averaging 9% growth p.a. for the 10 years to June 2018. Outdoor is boosting its reach thanks to digital billboards and because it is an advertising medium that is retaining its audience, allowing it to offer attractive “reach” to advertisers, particularly against free-to-air TV and print that are experiencing audience fragmentation or decline. Generating 47% of outdoor industry revenues, oOh!Media is the market leader and is well placed to capitalise on gains in market share.

Further, we like the market structure, with the market recently consolidating from four main players to two, after oOh!Media acquired Adshel and competitor JC Decaux bought APN Outdoor. As a result, we think the industry is set to become more rational. We’ve yet to see an industry go from four players to two and see pricing get worse. Trading on eight times enterprise value over earnings before interest, taxes, depreciation and amortisation versus transaction comps and international peers on 10 times, the valuation in our view is yet to reflect an improving industry structure and long-term structural tailwinds for outdoor.

Qantas Airways

Another stock that we expect to perform well in a softer environment is Qantas Airways. The Qantas first half result for fiscal 2018, while at first glance looked ho-hum as profit was down, showed the incredible strength of its franchise. Battling a fuel cost increase that on its own would have led to a halving of profit (see chart below), the company was able to pass all the fuel cost increase through to customers.

Click to enlarge. Source: Qantas presentation, 2019.

Since the end of the capacity war with competitor Virgin five years ago, Qantas has experienced a golden run. The shares are up from $1 to $5.60; the balance sheet is strong; dividends have been re-instated; and more than 25% of the shares on issue have been bought back – a remarkable turnaround. Can it continue? We think it can (subject to the usual caveats re consumer demand, oil prices and competitor behaviour) for the following reasons:

  • The pincer movement Qantas has put on Virgin with Qantas mainline and Jetstar encircling the premium and budget market thus allowing Qantas to achieve more than 60% market share but more than 90% profit share.
  • The remaking of international routes and alliances, which should make blowout losses a thing of the past.
  • The strength of the loyalty program (more than 10 million members) resulting in consistent delivery of about 25% of Qantas’s total profit.

Much can go wrong in an airline business but as we study the industry globally we are hard-pressed to find a company that has the unique advantages possessed by Qantas. The share price values Qantas as if it were no better than most global comparables with a price-earnings ratio (PE) of 9 times. If returns can be maintained, we believe Qantas could justify a PE ratio of 12 times, putting it on a similar valuation to premium-rated airlines such as Southwest Airlines (US) and Ryanair (Europe).

While Qantas and oOh!Media have sold off to low PE multiples of 9 times and 13 times respectively versus the broader market average PE of 17 times, we believe their improving industry structures should drive resilient profitability in the face of a weaker domestic consumer.

 

Emma Goodsell is Deputy Portfolio manager at Airlie Funds Management. Magellan Asset Management, a sponsor of Cuffelinks, bought Airlie in early 2018. This article is general information and does not consider the circumstances of any investor.  

For more articles and papers from Magellan, please click here.

 

  •   24 April 2019
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Why August company reporting season was poor

Let's focus on modern slavery in Australia

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

Will you run out of money in retirement?

Fear of running out has become a defining retirement anxiety. Why do some retirees die with substantial wealth while others deplete their nest egg? Evidence suggests the answer is more complicated than we think. 

The investment that sidesteps the new tax traps

Tax rules have changed, but many investors are still using yesterday’s strategies. Insurance bonds may offer advantages for those seeking greater control, tax efficiency and certainty about their wealth.

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

Latest Updates

Planning

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Investment strategies

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

Economy

Population growth masks Australia’s productivity problem

For years, investors have benefited from a seemingly reliable growth story. But recent national accounts raise uncomfortable questions about what has really been driving Australia’s economy and whether that can continue unchecked.

Investment strategies

Why tomorrow’s winners may not be today’s index leaders

The stocks that built retirement balances over the past decade now dominate many portfolios. The new challenge is whether these companies can continue meeting the increasingly high expectations embedded in today's share prices.

Investing

What earnings surprises reveal about future returns

Sometimes the most important information in an earnings result isn't the number itself. It's the possibility that the market's assumptions have been fundamentally wrong and future earnings may look very different.

SMSF strategies

Individual SMSF Trusteeship directly liable for ATO fines

A rarely discussed detail buried in SMSF structures could dramatically change who wears the cost when something goes wrong. With penalties rising, a decision many dismissed as administrative may deserve a second look.

Investment strategies

The currency bet you didn’t know you made

Buying global shares means making two bets: on the companies and on the Australian dollar. Most investors consciously choose only the first. Last financial year, the second bet cost 8.5% in returns for many investors.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.