Consumer Discretionary Spending Tiger Brands & Mr Price

03-Feb-2012 | News-Press Release

Discretionary income is the money an individual has left for spending after basic needs are met such as food, housing and clothing, in other words the income left after all expenses needed to maintain one's present standard of living. Discretionary income is the funds available for investing and saving and includes money spent on luxury items, holidays and non-essential goods and services. While non-discretionary income is mandatory as people have to eat, stay warm and be sheltered, discretionary income is optional. Families only spend money on things like fancy restaurants, dream holidays and expensive jewelry when there is money available to do so. When the economy is strong, discretionary spending tends to be high but when discretionary income falls, as during a recession or periods of high inflation, consumers will curb their spending on non-essential items.

Tiger Brands recently reported a marginal increase in revenue, which was negatively impacted by difficult trading conditions, price deflation in certain food commodities and promotional discounting in certain categories. While the non-discretionary food division did well, its discretionary snacks and treats division saw flat revenue as it was negatively impacted by continued pressure on consumer discretionary spending. The share appears to offer value trading on a historical P/E of 12.8 times. However, given the uncertainties related to the sustainability of an economic recovery, we would only recommend longer term investors to buy the share. The share has a decent dividend yield of 4%. Technically, it is still in a bullish trend as the share price is trading above its moving averages.

Mr Price reported a strong set of results for the year ended March 2011, as retail sales exceeded R10-billion and profit attributable to shareholders exceeded the R1-billion mark for the first time. Trading on a historic PE ratio of 15.3 times we feel that the share is fairly valued and recommend longer term investors to hold their shares. The share price is underpinned by a solid dividend yield of 3.9%. Although the share price of Mr Price is trading above its 200-day moving average, it is trading below its shorter-term moving averages. It is trading in oversold territory and should move higher.

These two companies have a similar type of focus that are producing completely divergent results, proving that there are opportunities available for investors willing to do their homework. 

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