Is Now An Opportune Moment To Examine Magazine Luiza S.A. (BVMF:MGLU3)?

While Magazine Luiza S.A. (BVMF:MGLU3) might not be the most widely known stock at the moment, it led the BOVESPA gainers with a relatively large price hike in the past couple of weeks. As a mid-cap stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. But what if there is still an opportunity to buy? Let’s take a look at Magazine Luiza’s outlook and value based on the most recent financial data to see if the opportunity still exists.

See our latest analysis for Magazine Luiza

What's the opportunity in Magazine Luiza?

Magazine Luiza appears to be expensive according to my price multiple model, which makes a comparison between the company's price-to-earnings ratio and the industry average. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Magazine Luiza’s ratio of 66.48x is above its peer average of 13.43x, which suggests the stock is trading at a higher price compared to the Multiline Retail industry. In addition to this, it seems like Magazine Luiza’s share price is quite stable, which could mean two things: firstly, it may take the share price a while to fall back down to an attractive buying range, and secondly, there may be less chances to buy low in the future once it reaches that value. This is because the stock is less volatile than the wider market given its low beta.

Can we expect growth from Magazine Luiza?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. With profit expected to more than double over the next couple of years, the future seems bright for Magazine Luiza. It looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.

What this means for you:

Are you a shareholder? It seems like the market has well and truly priced in MGLU3’s positive outlook, with shares trading above industry price multiples. At this current price, shareholders may be asking a different question – should I sell? If you believe MGLU3 should trade below its current price, selling high and buying it back up again when its price falls towards the industry PE ratio can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on MGLU3 for a while, now may not be the best time to enter into the stock. The price has surpassed its industry peers, which means it is likely that there is no more upside from mispricing. However, the optimistic prospect is encouraging for MGLU3, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.

If you'd like to know more about Magazine Luiza as a business, it's important to be aware of any risks it's facing. Be aware that Magazine Luiza is showing 2 warning signs in our investment analysis and 1 of those can't be ignored...

If you are no longer interested in Magazine Luiza, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.