The Carrefour stock picks are the result of our in-depth data analysis last week.
French supermarket group Carrefour (FR:CA) has been struggling to stand still for several years now. Since CEO Alexandre Bompard announced his initial plan to restructure the group shortly after his appointment in mid-2017, total shareholder returns, including dividends, have been negative 5%.
The poor results reflect intense competition and challenges for hypermarkets, a significant portion of which are owned by Carrefour. More recent concerns have centered on tough economic conditions in Latin America, which accounts for about a quarter of the group’s sales, and the cost of living crisis in Europe, which accounts for the rest.
However, Bompard, who is currently implementing a second strategic plan until the end of 2026, may have had a more positive impact on the underlying business than the stock market performance suggests.
While the stock may have gone nowhere during his tenure, improving business fundamentals have led to a significant drop in its value. By a number of measures, the stock is the cheapest it has been in decades, and is being bought by some of the most successful professional investors in the world.
Too cheap?
In total, 13 of the world’s best fund managers own Carrefour shares. All are among the top performers (around 3%) of the 10,000 global equity fund managers controlled by Citywire. This high level of smart money ownership has earned Carrefour the highest AAA elite company rating.
Meet your new equity research team – 277 of the world’s best portfolio managers!
“We think well-run large grocery retailers are better than the average business,” says Sean Peche, a major investor who runs the Ranmore Global Equity fund, which has Carrefour among its top 10 holdings.
“They provide a vital service to society and provide attractive returns on capital and stable cash flow through favorable working capital dynamics. Under current management, Carrefour has doubled its operating profit over the past five years. [and trades on] eight times the expected income.”
Perhaps the most striking endorsement of Carrefour’s valuation is that free cash flow over the next 12 months is forecast to be equivalent to around 15% of the company’s total market value.
Cash back
The balance sheet also looks strong, boosted by last year’s €1 billion sale of Carrefour’s Taiwan business. Excluding borrowings related to the company’s lending business and lease liabilities of €4.9 billion, net debt at the end of 2023 was €2.6 billion. This allows Carrefour to return a ton of money to shareholders.
Carrefour has a projected yield of 6.4% and, in addition to a large dividend, the company plans to buy back €700 million of shares this year. Since the start of 2021, the company has already reduced its share count by 17% through share purchases.
Investors can expect big cash returns to continue flowing.
Management has promised a dividend increase of more than 5% through 2026 and further annual share buybacks. Underlying this is the target of generating more than €1.7 billion in annual free cash flow by 2026, which compares with forecasts of €1.5 billion over the next 12 months.
On target
Key to achieving the target is a planned cost reduction of €4 billion between 2023 and 2026. Much will be achieved by using group size to improve procurement, create leaner management and improve logistics.
The scale was recently boosted by the company’s first major acquisition in France in 20 years: the soon-to-be completed purchase of 175 stores under the Cora and Match brands for €1.1 billion, equivalent to a 4.2x increase in earnings before interest, taxes, depreciation and amortization . and depreciation (Ebitda) if expected cost savings are achieved.
Carrefour’s Brazilian unit also received a major boost from its 2022 acquisition of Grupo Big for R$7 billion.
Bompard’s strategy of operating a large number of franchise stores also contributes to efficiency. In the company’s eight main territories, 72% of stores now operate under such agreements.
Not all savings will be passed on to shareholders. Competition remains fierce both domestically and internationally, and Carrefour is cutting prices to retain and attract customers. This includes a goal of achieving 40% of private label sales by 2026; the figure is currently 37%, up from 25% in 2018.
Bompard believes there are opportunities to boost profits by opening more convenience and discount stores, expanding into e-commerce, renovating properties and entering into a joint venture with a AAA-rated advertising giant. Journalism (FR:PUB) to create marketing services based on customer data.
After years of going nowhere while its fundamentals improved, Carrefour’s stock valuation has fallen so low that it doesn’t take much for the stock to turn a profit. And if recent economic headwinds begin to ease, that could lead to significant growth.
| Key facts – Carrefour | |||
|---|---|---|---|
| Market capitalization | 10.1 billion euros | Price | 14.94 euros |
| Net debt | 13.4 billion euros | Net Debt/Ebitda | 2.9x |
| 52 week high/low | 18.72 euros/14.73 euros | Return on invested capital | 7.2% |
| Highest price per profit | 7.3 | First dividend yield | 6.4% |
| Fastest EPS Growth | 10.1% | share price for 12 months | -10.9% |
Source: FactSet, accessed June 7. EPS = earnings per share. Ebitda = earnings before interest, taxes, depreciation and amortization. Forecasts for the next 12 months.
This article first appeared in The Telegraph magazine. Quaestor column.