Expansion Into Fintech And AI Expected To Strengthen Future Prospects

Key Takeaways

• Diversification into 3P marketplaces, fintech, and advertising is aiming to enhance revenue, reduce cyclicality, and improve net margins.
  
• Strategic acquisitions, logistics enhancements, and AI-driven customer engagement are expected to boost market share, operating efficiencies, and revenue growth.
  
• Rising interest rates and economic uncertainty in Brazil threaten margins and revenues, while expanding credit offerings present significant financial risks.

Catalysts

Engages in the retail sale of consumer goods.

• Magalu's strategy of expanding into new revenue streams such as 3P marketplaces, fintech through MagaluPay, and advertising via MagaluAds is aimed at diversifying its income and reducing cyclicality, potentially enhancing future revenue and net margins.
  
• The successful integration and profitability of acquisitions like Netshoes and KaBuM!, as well as logistics improvements via Magalog, signal potential for increased market share and operational efficiencies, which may positively impact future earnings.
  
• The focus on enhancing conversion rates and leveraging AI for better customer experience and operational automation is expected to drive revenue growth and improve net margins by optimizing marketing spend and improving customer engagement.
  
• The expansion of physical stores for acquired companies, such as Netshoes and KaBuM!, is poised to enhance omni-channel capabilities, potentially boosting revenues by utilizing brick-and-mortar locations strategically to support online sales.
  
• The operational and financial improvements within Luizacred and new financial services enabled by the Central Bank’s license for MagaluPay indicate potential for accelerated growth in credit services, contributing positively to future net margins and earnings.

Magazine Luiza Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Magazine Luiza's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.2% today to 2.1% in 3 years time.
• Analysts expect earnings to reach R$924.5 million (and earnings per share of R$1.41) by about May 2028, up from R$448.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$1.3 billion in earnings, and the most bearish expecting R$579 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.6x on those 2028 earnings, down from 16.4x today. This future PE is greater than the current PE for the BR Multiline Retail industry at 5.4x.
• Analysts expect the number of shares outstanding to grow by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 23.46%, as per the Simply Wall St company report.

Magazine Luiza Future Earnings Per Share Growth

Risks

• High interest rates, particularly those expected to rise to 15%, increase financial costs and could pressure net margins and earnings.
  
• The company may face challenges in growing profits due to the complexity and potential costs of expanding fulfillment and managing inventory effectively, potentially affecting EBITDA margins.
  
• Tight competition in the brick-and-mortar and online retail space could hinder Magalu's ability to maintain and grow market share, impacting overall revenue.
  
• Uncertain economic conditions in Brazil, exacerbated by rising interest rates and possible inflation, could dampen consumer spending, affecting sales revenue.
  
• Dependency on expanding credit offerings such as Crediario entails credit risk, with potential delinquency affecting net earnings if not managed carefully.

Valuation

• The analysts have a consensus price target of R$9.671 for Magazine Luiza based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$15.0, and the most bearish reporting a price target of just R$6.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$45.0 billion, earnings will come to R$924.5 million, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 23.5%.
• Given the current share price of R$9.98, the analyst price target of R$9.67 is 3.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.