Metcash Limited (ASX: MTS) shares continued their descent on Tuesday, falling around 6.5%, despite falling a similar amount on Monday.
Metcash is a leading wholesale distributor of supermarket products and the owner of popular retail brands like IGA, Mitre 10 and Foodworks. In liquor it owns The Bottle-O, Cellarbrations and Duncans.
As we reported yesterday, Metcash released its 2019 half-year financial report to the market showing a 2% increase in revenue and profit up 3% to $95.8 million. You can read our full coverage of the announcement here.
The thing with Metcash is it’s facing a tough outlook. Aldi, Woolworths Group Ltd (ASX: WOW) and Coles Group (ASX: COL) are fierce competitors. But the fiercest of competitors is Amazon.com Inc (NASDAQ: AMZN). As we reported here Amazon is already offering lower prices on household products than Coles and Woolworths.
Are Metcash Shares A Bargain?
Metcash shares appear quite tempting at today’s prices given the trailing 5% fully franked dividend yield and a modest price to profit ratio (P/E) of 11 times. That compares to the S&P/ASX 200 (INDEXASX: XJO) (^AXJO) average of 16 times.
One way I like to get a quick ‘read’ on the valuation of shares like Metcash is to use a very simple dividend discount model (DDM) or discounted cash flow (DCF) using the forecast dividends or average free cash flow from recent years. I explain all of the major valuation techniques (and provide a template) in Rask’s free valuation courses.
At today’s prices, even if we assume Metcash’s current dividend of around $0.13 per share is sustainable (note: I’m not convinced it is) then the valuation for Metcash shares drops to $2.40. At the current price, that makes Metcash shares fairly valued, using a simple dividend model.
However, as savvy long-term investors we want to buy shares when they are trading materially below their fair value. Of course, a more thorough valuation of Metcash’s assets, including its hardware and liquor businesses, is required before arriving at a buy or sell decision.
In summary, with over 2,000+ shares on the ASX and thousands more abroad, I’m happy to watch this one from the sidelines and invest in other great Aussie businesses, such as those below…
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