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On Tuesday, JPMorgan issued a downgrade for Cia Brasileira de Distribuicao (PCAR3:BZ) (NYSE:CBD), moving its stock rating from Neutral to Underweight. The change in rating by JPMorgan analyst Joseph Giordano is rooted in concerns about the company's cash generation and leverage, despite acknowledging improvements in operating results. According to InvestingPro data, the company currently maintains a "FAIR" overall financial health score of 2.0 out of 5, with particularly concerning cash flow metrics.
Cia Brasileira de Distribuicao, also known as Grupo Pão de Açúcar, has been recognized for its efforts in revising its assortment and streamlining operations. These initiatives are anticipated to continue to enhance profitability into 2025, with expectations of reaching approximately 9.5% of adjusted EBITDA margin. The company's current performance shows concerning metrics, with a negative EBITDA of $0.46 million in the last twelve months and a return on invested capital of -59%. Get deeper insights into CBD's financial health metrics and exclusive ProTips with an InvestingPro subscription.
However, Giordano points out that the company's leverage, projected at 3.2 times in 2025, coupled with potentially higher interest rates, presents challenges. While current debt-to-equity ratio stands at just 0.01, the company's negative free cash flow of -$19.8 million raises concerns about future leverage management. Furthermore, while the company has expressed intentions to rationalize its footprint by closing or divesting stores, particularly in the less synergistic northern and north-eastern regions of Brazil, these plans are still in the preliminary stages.
The analyst also noted that there are no considerable assets that could be sold quickly to significantly improve the company's leverage situation. Additionally, there are doubts regarding the potential benefits of a merger with supermarket chain Dia, with skepticism about whether such a move would meaningfully enhance Cia Brasileira de Distribuicao's operations or balance sheet.
With these factors in mind, and considering the company's valuation at roughly 5.5 times its projected 2025 enterprise value to EBITDA, JPMorgan has taken a more cautious stance on the stock. The revised Underweight rating reflects the firm's concerns about Cia Brasileira de Distribuicao's financial strategy and market position in the face of economic pressures.
In other recent news, Companhia Brasileira de Distribuição experienced a downgrade in its stock rating from Neutral to Underweight by JPMorgan. This decision was made despite the retailer's improving operating results and an anticipated adjusted EBITDA margin of approximately 9.5% in 2025. The downgrade was driven by concerns over the company's cash generation and leverage, with JPMorgan predicting a leverage ratio of 3.2x in 2025.
The company has been examining the possibility of reducing its store footprint, particularly in areas of Brazil where its operations lack synergy. However, JPMorgan analysts believe it is too early to determine the effectiveness of these measures. The firm also expressed skepticism about a potential merger with Dia, doubting it would significantly enhance Companhia Brasileira's operations or financial position.
These recent developments underscore JPMorgan's cautious stance on Companhia Brasileira's financial health amidst a challenging economic environment. The firm's rating adjustment reflects these concerns, positioning Companhia Brasileira as Underweight in their investment outlook.
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