Breville shares: top ASX growth stock for 2023?

As analysts consider whether inflation may have finally peaked — and with Australia’s Reserve Bank finally pausing the cash rate at 3.6% after 10 consecutive hikes, green shoots may be emerging for the best ASX growth stocks.

These medium-sized companies rely on loose monetary policy to achieve continued growth — and therefore have suffered share price falls as rates have risen. But while RBA board members have cautioned that further rises may be necessary as more data comes in, some growth investors may be considering that the bottom could be in.

Breville shares: best ASX growth stock?

Breville's share price has been volatile for years. At AU$20.62 apiece and boasting a near-$AU3 billion market cap, the stock is up 87% over the past five years, 10% year-to-date, and yet down 19% over the past year. Indeed, Breville shares were worth more than AU$33 in August 2021, and as little as AU$17 in June 2022.

This is not an ASX growth stock for the faint-hearted. However, the company boasts strong brand recognition, including its flagship Breville brand, and also Sage, Kambrook, and Baratza. Its global expansion, alongside significant R&D, have continued to deliver strong earnings growth over the past decade.

In first half FY23 results, the company saw EBITDA rise by 13.1% compared to the same half in the last financial year to $141.9 million. Meanwhile, net profit after tax rose by 1.3% and gross margin increased by one percentage point to 35.1%. These are strong numbers given the inflationary environment.

Return on equity did fall from 19.7% to 16.1%, though most of this decline came from its $169 million acquisition of Lelit — a premium seller of coffee machines and ironing systems that complements its existing business. This came after its 2020 acquisition of coffee grinder manufacturer Baratza — creating an exceptionally strong premium coffee product range.

CEO Jim Clayton enthuses that ‘the strength of our product portfolio, coupled with the maturity and agility of our underlying Acceleration Platform, cut through the macro-economic headwinds of the 1H23.’ Indeed, this portfolio could be giving Breville the ultimate protection — an economic moat.

Clayton further notes that ‘we managed price to counter material input and logistics cost inflation as well as negative currency swings; we leaned on our geographic diversification to deflect the impact of EMEA retailers buying much less than they were selling.’

In addition, the ASX growth company has strategically pivoted to take advantage of changing market trends, including air fryers and ‘cafe quality’ coffee at home.

Where next for Breville shares?

Goldman Sachs analysts recently released a positive note for the ASX growth stock, noting that they ‘expect BRG will continue to execute on GP margin expansion. We remain supportive of BRG’s characteristics as a high-quality name in a secular growth category and believe they will be able to demonstrate revenue and EBIT CAGR of 7.6% and 11.1% over FY22-25.’

The investment bank has a ‘buy’ rating on the stock with an AU$22.70 price target, more than AU$2 higher than the current price level.

Non-executive director Lawrence Myers recently spent almost AU$600,000 buying shares through a family trust fund just before its fully franked 15 cent-per-share first half dividend pay-out on 27 March. Increased management skin in the game is an excellent sign — and could point to further share price increases in the future.

However, ASIC’s latest short position report shows that Breville Group shares are suffering relatively high short interest of 7.3%, meaning that many traders think it could start to struggle in this inflationary milieu. CPI inflation is still at 6.8% — so cash-strapped consumers are having to weigh up whether Breville’s brand power and reputation for quality are worth spending a little more.

But if inflation continues to fall and the cash rate remains static, then Breville shares could now be undervalued.

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