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David Jones under a cloud

Broker reports editor |  27 September 2013  |  Big Picture

Uncertain
Retailing is doing it tough in Australia, so investing in stocks like David Jones and Myer is problematic. However, any stock can be a good buy at the right price. According to a Deutsche Bank report, however, David Jones is still too expensive. It has a sell recommendation on the company and a pessimistic price target of $2.30. 


"We believe David Jones has demonstrated reasonable progress on its efforts over the past 18 months to address the structural challenges facing the business. However, the actions taken have not been reflected in the earnings. Sales are still declining, gross margin improvement has slowed and the decline in the Financial Services business will leave a large earnings hole, yet the stock is trading on almost 19x FY14 EPS which we believe is far too expensive. We believe consumer sentiment will improve but in our view, Myer is the best way to play the sector given it is 30% cheaper and offers superior free cash flow generation."

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According to Deutsche, David Jones is on a forward dividend yield of 4.7%, which is reasonable, but is on an earnings multiple of 18.8 times, which is on the high side. The AFR is also reporting that Bell Potter has a sell:

"David Jones does have potential upside from its relationship with Dick Smith, which will manage its electronics segment, and also from its recently installed point-of-sale IT systems, online strategies and from development of the four flagship stores in Sydney and Melbourne in the longer term.

"Bell Potter expects to reduce its 2014 forecasts for David Jones, with a decline in profit a likely outcome to around $90 million.

The retailer remains constrained by its higher demographic market and is continuing to explore exclusive deals with global fashion labels, recently adding Phase Eight to its portfolio."

With a high earnings multiple and profits potentially under pressure, investors should be wary.

 


Source articles

The AFR


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