Home > Market Commentary > Carrefour (FR: CA): Still Overvalued

Carrefour (FR: CA): Still Overvalued

Scott Evans of Esprinto Santo Investment Bank recently upgraded Carrefour (FR: CA) from a sell to a buy (see CNBC article, video). I’ll run the stock through a quick fundamental process that demonstrates why the stock, despite pronounced declines in price, remains a bit overvalued relative to its performance and outlook (data from S&P’s Capital IQ). Below we see that CA has underperformed Wal-Mart, Target, and the S&P 500 over the past 12 months:

Starting from the top, note that Carrefour has comparable Rev/Share to Wal-Mart, except WMT’s grows steadily, while CA’s is stagnant.

The real problem is what Carrefour does with its revenue. EBITDA/Share trends down despite steady revenues, while WMT grows its EBITDA/Share consistently.

Thus, CA’s Operating Margin is evaporating, while WMT’s holds steady at an unspectacular 6.0%.

WMT’s net margin of 3.5% is low but steady, and five times larger than CA’s 0.5%.

To recommend this stock, an analyst must have some positive thesis that Carrefour can resume growing, albeit slowly, and dramatically turn around operational inefficiencies that are annihilating its margins. However, Bloomberg published the following headline yesterday:

If retail sales in the US are a problem, and the US is supposedly in better economic shape than Europe, how is Carrefour going to turn things around now? They probably have several more quarters of turbulence ahead of them, and maybe a few more years.
Wrapping up with a few additional metrics, we see that CA’s ROA has been stuck under 1% for 3 years, vs. WMT, which consistently earns 8-9%:

CA’s NOPAT/Share has declined for 5 straight years, while WMT’s has grown each year:

Predictably, CA cannot generate positive FCF/Share, which crushes their intrinsic value (shown below):

Modeling CA’s Weighted Average Cost of Capital (WACC), I raised their low historical beta of 0.5 to 0.65 to better account for their risk going forward, and also raised the risk-free rate 50 basis points from its current lows, which gives CA a very low 5.0% Cost of Capital.

I also expanded CA’s pro forma operating margins back to 1.5%, and gave them credit for growing 0.5% per year in perpetuity. This results in a pro forma Return on Invested Capital of 5.7%, which is slightly above their WACC, indicating that they can generate some small amount of value creation going forward. Using these optimistic assumptions, CA models up right around its current price, with an intrinsic value of $16 vs. its current share price of $13.66:

The key thing to notice is that, despite these positive modeling assumptions, CA’s price does not grow further in the pro forma analysis. So even though it might be $2-$3 undervalued, the stock does not have much room to run. It would quickly regain its overvalued status as soon as it hit $17-$18 share.

My conclusion: If you want exposure to a giant retail stock, start selling put options on WMT and get paid to wait through the summer and fall market volatility and hope to buy the stock on a future dip in price. Avoid Carrefour until something material changes to nudge it out of its devaluation death spiral.

Categories: Market Commentary
  1. November 30, 2012 at 6:17 am

    How have high-frequency traders responded?

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