Magazine Luiza (MGLU3): Risk or Opportunity?

Magazine Luiza (SA:) shares are down on the market, but up on the news. With a drop of 84.38% in the last 52 weeks, the company’s shares went from R$20.90 to the current R$3.22 in one year. And, with that, they left many investors with their hair standing on end, with a loss at the moment, but still hopeful of a future recovery to the level they had before the retailer’s shares.

During this period, there was no lack of analysis to try to understand what happened to Magalu. Once one of the darlings of the stock market, the stock has always traded with high multiples, but this did not prevent the market from continuing to buy up to a maximum appreciation of an incredible 91,300% – when it exceeded R$27 – and it had to carry out three splits to facilitate liquidity in the period.

But what does InvestingPro, the fundamental analysis platform of the, says about MGLU3? Is it opportunity or risk?

Simply put, the answer is simple: both. Magalu’s current price may show an interesting entry opportunity, but the company’s financial health and the comparison with competitors’ shares also leave doubts.

Opportunity in Price

MGLU3 closed this Wednesday’s trading session at R$3.22. But InvestingPro’s advanced metrics show that the stock has an average fair price of R$4.10. If it actually reaches this value in the future, it would have a 27.2% appreciation.

Within the parameters of Pro, the share price is currently classified as slightly undervalued as it has this expectation of growth above 25%, which is generally considered very good in the financial market.

MGLU3: Magazine Luiza shares fair price

InvestingPro uses 13 different growth projection models to determine Magazine Luiza’s fair price. And in some of them, the paper is estimated to even exceed R$6 in the medium term.

According to the Price/Sales indicator, MGLU3 is currently trading at 0.6x and the forecast based on the indicator would reach up to R$6.40. On the other hand, projections based on revenue multiples envision the paper going up to R$6.23. In other words, there are reasons to be hopeful.

MGLU3: Magazine Luiza Historical Price Chart

MGLU3: Magazine Luiza Historical Price Chart

Risk in Finance

On the other hand, despite the upside potential, investment in Magalu is far from risk-free โ€“ as might be expected given the recent history of declines. InvestingPro’s financial health tool rates MGLU3 on more than 100 factors, within five categories, compared to other companies in the Consumer Cycle segment.

MLGU3: Financial Health Score in 5 Categories

MLGU3: Financial Health Score in 5 Categories

The categories are: cash flow, growth, momentum, profit and relative value. And Magazine Luiza’s general classification in them is D (2, in the image above), and in momentum it is even considered E โ€“ naturally, since the price has dropped dramatically in the last year.

As with the price, Magalu’s financial health has deteriorated significantly since mid-2021. Even though it is one of the leaders among retailers in Brazil, the company suffers from the effects of a macroeconomic scenario of high inflation and interest and unemployment rates (although in decrease in this case) on the rise, in addition to the reopening after vaccination against Covid-19 tends to direct consumer preference towards the service sector.

Cash flow has decreased, profit margins remain low (as is common in the industry) and debt has increased. In other words, there are reasons to be concerned.

MGLU3: History of Financial Health

MGLU3: History of Financial Health

Retail Overview

Magalu’s two main competitors on the stock exchange are Americanas (SA:) and Via SA (SA: – owner of Casas Bahia and Ponto). Companies such as Renner (SA:), Marisa (SA:), Grazziotin (SA:) and Lojas Quero-Quero (SA:), among others, are still considered within the retail sector. And the sector comparison has mixed results for MGLU3 at the moment.

Some MGLU3 price multiples are too high for the stock to be attractive to buyers, such as P/E (125x) and EV/EBITA (99x), compared to a much lower average among competitors in the sector.

Efficiency metrics also fall short, with gross margin (24.7%) lower than VIIA3 (30.0%) and AMER3 (30.1%), ROE (1.9%) below AMER3 (4.6 %) and ROIC (0.2%) also lower than both (1.3% and 3.5%, respectively).

And the growth potential according to the fair price of the Pro is also lower than the two: its 27.2% is below Via (37.2%) and Americanas (42.6%) for now.

But there are positives. Even with the economic uncertainties in Brazil, Magalu has higher revenue than its peers: it closed 2021 at R$35.8 billion, above Via (R$30.7 billion) and Americanas (R$26.5 billion).

Its debt is also still lower than that of its main rivals, representing 93.7% of shareholders’ equity โ€“ a level considered acceptable, since the ideal is not to exceed 100% in this indicator. VIIA3 has a debt of around 286%, while AMER3 has 114.1%.

And the future may even be encouraging again for Magazine Luiza’s investors. InvestingPro has projected future revenue for the company above rivals: R$40 billion for MGLU3 by the end of 2023, with R$33 billion for Via and R$32 billion for Americanas. And the projection of average revenue for the next five years is over R$50 billion per year, also above Via (about R$40 billion) and Americanas (R$44 billion) in the period.

Chart: Performance vs Valuation Retail Shares

Chart: Performance vs Valuation Retail Shares

And you, are you optimistic or pessimistic about Magalu?

NOTE: The data presented in the text was collected on Wednesday, June 8, 2022

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This article is for informational purposes only; does not constitute investment recommendation and does not intend to encourage the purchase of the aforementioned shares. Remember that every company must be analyzed from different points of view and investing in the equity market always implies risks.