What does Metacash Ltd do?
Metcash Ltd [ASX:MTS] is a wholesale distribution and marketing company. It is exposed to food and liquor retailing, and hardware. MTS owns brands such as IGA supermarkets and liquor, and Mitre 10 hardware stores. Its customers are the independent owners of these stores; MTS distributes the product and provides marketing support for the brands.
What’s happening to the Metcash share price?
Today, Metcash released its 2016 full-year results (for the year ended 30 April). Results were broadly in line with expectations, and the stock price held up well in early trade.
But, after a couple of hours, the market digested the result and decided to sell. By early afternoon, the stock price was down around 12%.
What caused the selloff in MTS shares?
Metcash’s main business is the supermarkets division, under the IGA brand. It competes with Coles and Woolworths, with Aldi moving in on its territory in South and Western Australia.
Given the supermarket is in the midst of a transformation/turnaround program, which seems to be gaining traction, comments on the outlook hardly inspired confidence. It looks like the market took this as a cue to sell.
What now for Metcash Ltd?
While the initial reaction to the result wasn’t a good one, Metcash’s share price has rallied strongly over the past nine months or so. As you can see in the chart below, since bottoming in September 2015 at just below $1.00, Metcash went on to rally more than 120%.
Heading into today’s result, the share price was in a solid uptrend. Although today’s reaction brings this into doubt. MTS is still part way through a transformation program to improve its competitive positioning. But part of this involves competing on price, which will weigh on profitability in the short term.
The company isn’t overly expensive, trading on a price-to-earnings ratio of 11.7 times. But that reflects the uncertainty over how it will go with increased competition.
In short, it’s a confusing outlook. The share price is still in a good uptrend, and the business transformation looks to be going OK. But the market has question marks over IGA’s viability, with Aldi making inroads. It’s too early to make a call based on today’s result and market reaction. If the share price can rally back above support, at $1.90, it will make a strong case for continuing to hold.
Never assess a stock’s fundamentals without looking at the chart too. Combining fundamental analysis with charting can yield powerful results.
Editor, The Daily Reckoning