Goldman Sachs initiates on Breville with Buy

Not even Goldmans Sachs’ decision to initiate coverage on Breville with a Buy rating and target price of $23.40 – a 20% upside the current price – could spark investor enthusiasm for either the consumer discretionary sector (JDJ:ASX) or the stock with both down -0.06% and -1% respectively at the close today.

Premier Investments (ASX: PMV) received similar market treatment, with the specialty retail fashion chain down -2.46% at the close following an upgrade by Goldman’s to Neutral from Sell.

While Goldman’s retains a Buy on Harvey Norman (ASX: HVN) the broker believes the stock also remains a standout on valuation – despite the price target dropping -22.4% due to a weaker housing cycle - and dividend yields of 11.8% in FY22 and 9.3% in FY23.

Defensible competitive moats

Against a challenging backdrop, Goldman’s sees two factors as critical for companies: Strengthening consumer stickiness - by leveraging data and digital – and balance sheet strength.

The broker favours exposure to discretionary goods companies with mid-high-income exposure and defensible competitive moats like Breville [and Harvey Norman] and believes the market is too bearish on these two stocks.

By comparison, the broker believes the market remains too optimistic on Domino’s (ASX: DMP), Wesfarmers (ASX: WES) and JB Hi-Fi (ASX: JBH).

Breville’s three-pronged strategy

Contrary to market speculation, Goldman’s doesn’t believe Breville will be a casualty of reopening resulting in weaker consumption, after being propped up during abnormally high covid home-in consumption.

The broker expects solid growth to continue from a three-pronged growth strategy:

• Building on secular growth of the portioned and roast & ground (R&G) coffee market and achieving market share gains.

• New market entry.

• Options – ecosystem revenue streams.

The broker expects Breville to deliver FY22-24 10.4% sales compound annual growth rate (CAGR), 14.9% NPAT CAGR with return on invested capital (ROIC) in FY24 of 28.9%.

Critical step

While Breville is only at the beginning of its transformation from “product solutions” to “consumer solutions”, Goldman’s believes it’s a critical step for more accurate product innovation, faster geographical deployment and a more engaged/loyal consumer base for new revenue stream options.

Breville share price over 12 months.