4 of Morgan Stanley's best pre-reporting season ideas

The ASX full-year reporting season kicks off this time next week. Analysts and portfolio managers have been sharpening their pencils, narrowing down their watchlists, and getting their buy/hold/sell recommendations ready to be reviewed. But if you have not had the chance to do the same, then we may be able to help.

Morgan Stanley has been releasing their best pre-reporting season ideas. They encompass a range of sectors, include views for both August and beyond, and best of all, every single idea is an ASX small or mid-cap stock. This wire will summarise four of those names, the bull cases for each, and the one or two things that can turn their bullish case into a bearish one.

Jumbo Interactive (ASX: JIN)

Bull case: Everyone dreams of winning the lottery, but the reason analysts like this stock is primarily due to two structural tailwinds - an increase in ticket sale volumes (accompanied in turn by an increase in the prize pot) and the acceleration in digital gameplay. This, plus what analysts feel is a low consensus earnings hurdle, all suggest this is a company due for an upside surprise.

"We see little revenue downside risk, a key point of differentiation versus most consumer stocks," analysts led by James Bales wrote.

They also argue that the company's position as a low-cost operator means it can generate extremely high incremental margins. There may also be some EPS accretion opportunities available for JIN through strategic M&A movement.

The catch: If jackpots do not go up in the way that analysts expect, ticket sales will likely also soften in response. Similarly, if there is a lack of M&A catalysts for the company, that takes away a key part of the analysts' bull case.

Audinate (ASX: AD8)

Bull case: In the case of Audinate, it's not so much what is already priced into the stock but what isn't priced in. The stock is down 33% from its March 2024 post-earnings peak, even though management has reiterated its revenue and earnings growth guidance for FY24. 

Three bullish themes, analysts say, are not in the price.

"While [the sell-side] consensus does have 21% FY25e / 26% FY26e growth, we think buy-side expectations are much lower," analysts led by Chenny Wang noted. "We are more optimistic, and see structural share gains to continue being the primary growth driver, particularly as the video opportunity takes shape."

Secondly, Audinate is part of an industry that is still dealing with a major order backlog and positive revenue trends. Naturally, a bigger order backlog means a clearer picture concerning future revenues. Finally, video adoption trends over the past 12-24 months have been robust and analysts expect this trend to continue.

The catch: Morgan Stanley is more bullish than the consensus, who are concerned the company has to deal with backlog release headwinds, macro headwinds, and a higher earnings bar to clear. If any of these three experience major issues, then this could impact the company's post-earnings share price. In addition, there are two other key risks for Audinate shareholders - namely, if the company chooses not to release guidance and whether the company will be able to announce a new CFO at its earnings later next month.

Life360 (ASX: 360)

Bull case: If you had any doubt about how bullish the team at Morgan Stanley are on this stock, their analysts have extended their discounted cash flow (DCF) estimates out to FY33 (yes, you read that right, until the end of June 2033). It also helps that the team have upgraded 360's price target from $17.50 to $19/share ahead of earnings. 

"With a user base of over 66 million and a paying subscriber base of 2 million, we see scope for further optionality to arise. Meanwhile, core business execution is running ahead of plan," analysts wrote.

Analysts add that there are two extra tailwinds not in the price: one is the extra effects of instituting advertising for its free customers and the other concerns innovation around the company's hardware offering "Tile" (for the uninitiated, it's like an Apple AirTag.)

On the extra advertising tailwind, analysts write:

And on the hardware offering:

The catch: Analysts identify four key risks with 360's future growth plans. On the advertising side, there may be delays in its roll-out which could impact the user experience. With regards to Tile, delayed product releases are entirely possible. Given that Q3 and Q4 are generally considered to be 360's revenue peaks (US back-to-school, holidays etc), a delay in product releases could impede future earnings. 

Outside of these two, softer MAU growth and the risk of increased competition from other players may mean 360's management has to step up its R&D investment (an investment that may not necessarily lead to a one-for-one increase in sales.)

Premier Investments (ASX: PMV)

Bull case: Morgan Stanley has been notably bearish on the Australian consumer. The most recent update to their model portfolio has a significant overweight to consumer staples/defensive industrial stocks and an even bigger underweight to consumer discretionary/cyclical stocks. But Premier Investments stands out for both its potential to beat lowly expectations this August as well as its long-term opportunity.

Concerning the immediate future:

"We see upside risk to FY24 Retail EBIT given several listed retail peers have reported results that were better-than-market expectations on stronger 4Q trading, and PMV has a strong track record of beating expectations," analysts wrote.

"Longer-term, we think Premier has a long runway for growth, supported by strong execution, brand equity, product innovation and strong balance sheet. Risk-reward looks attractive at 15x FY25 P/E with demerger catalysts," they added.

That long-term opportunity, Morgan Stanley argues, is not in the price and will be fuelled by offshore expansion, some domestic retail sales growth, and the operating leverage that is built into the business.

There could also be some opportunity gleaned from internal corporate activity - namely, a breakup of the Smiggle and Peter Alexander businesses and/or a merger between Premier's apparel businesses and Myer.

"On FY25E, we value Peter Alexander at 25x P/E (Peter Alexander has been the fastest growing retailer in Australia over the last five years), Smiggle at 20x (recent performance has been challenging, however, we continue to see a large global opportunity), and Apparel 10x," analysts wrote.

The catch: Needless to say, the biggest risk for Premier Investments is the same for all retailers. Subdued demand from ongoing cost-of-living pressures is still a key risk, especially if the RBA were to commence a second round of rate hikes starting in August. A higher cost inflation environment would also clearly crimp margins. Finally, valuations could de-rate if the company does not beat analysts' earnings expectations.