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On Thursday, Jefferies initiated coverage on Magazine Luiza shares, assigning a Buy rating and setting a price target of R$13.60. The firm’s analysis acknowledged the current weak sales momentum of the Brazilian retailer but projected an uptick due to strategies involving credit expansion and the launch of new initiatives. Analysts at Jefferies anticipate that these efforts will not only enhance sales but also lead to a modest improvement in profit margins, contributing to higher returns on invested capital (RoIC).
Magazine Luiza’s financial leverage, which measures the degree to which a company uses borrowed money, has seen a significant reduction, dropping from 12.7 times earnings before interest, taxes, depreciation, and amortization (EBITDA) in the first quarter of 2022 to 4.5 times currently. Jefferies views this deleveraging process as a positive trend that is expected to continue. Despite the challenges posed by high interest rates impacting the company’s earnings, the firm believes that Magazine Luiza is well-positioned to benefit from potential interest rate decreases. Specifically, they estimate that a 1.0 percentage point reduction in interest rates could increase the company’s earnings before taxes (EBT) by 166%.
The research firm also highlighted the attractive valuation of Magazine Luiza, noting that it is trading near historical lows with a 2025 estimated enterprise value to EBITDA (EV/EBITDA) ratio of 6.3 times. This valuation metric is often used to compare the value of a company, including debt, to its cash earnings less non-cash expenses. It’s an indicator of how cheap or expensive a company’s stock is relative to its earnings potential.
Magazine Luiza, a major player in the Brazilian retail sector, has been navigating a challenging economic environment characterized by fluctuating interest rates and consumer spending patterns. The company’s efforts to adapt through credit expansion and the introduction of new business initiatives demonstrate its proactive approach to overcoming these obstacles.
The endorsement from Jefferies, with a Buy rating and a positive outlook on the company’s financial health and strategic direction, may influence investor sentiment and contribute to the market’s perception of Magazine Luiza’s future performance. The firm’s analysis suggests a potential upside for the retailer, based on the expected improvement in sales, margins, and reduced leverage in the face of a changing economic landscape.
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