What Is Happening to the Metcash Share Price

What does Metacash Ltd do?

Metcash Ltd [ASX:MTS] is a wholesale distribution and marketing company. It is exposed to food and liquor retailing, and hardware. MTS owns brands such as IGA supermarkets and liquor, and Mitre 10 hardware stores. Its customers are the independent owners of these stores; MTS distributes the product and provides marketing support for the brands.

What’s happening to the Metcash share price?

Today, Metcash released its 2016 full-year results (for the year ended 30 April). Results were broadly in line with expectations, and the stock price held up well in early trade.
But, after a couple of hours, the market digested the result and decided to sell. By early afternoon, the stock price was down around 12%.

What caused the selloff in MTS shares?

Metcash’s main business is the supermarkets division, under the IGA brand. It competes with Coles and Woolworths, with Aldi moving in on its territory in South and Western Australia.

Given the supermarket is in the midst of a transformation/turnaround program, which seems to be gaining traction, comments on the outlook hardly inspired confidence. It looks like the market took this as a cue to sell.

What now for Metcash Ltd?

While the initial reaction to the result wasn’t a good one, Metcash’s share price has rallied strongly over the past nine months or so. As you can see in the chart below, since bottoming in September 2015 at just below $1.00, Metcash went on to rally more than 120%.

Heading into today’s result, the share price was in a solid uptrend. Although today’s reaction brings this into doubt. MTS is still part way through a transformation program to improve its competitive positioning. But part of this involves competing on price, which will weigh on profitability in the short term.

Metcash MTS share price 20Jun16

Source: BigCharts

The company isn’t overly expensive, trading on a price-to-earnings ratio of 11.7 times. But that reflects the uncertainty over how it will go with increased competition.
In short, it’s a confusing outlook. The share price is still in a good uptrend, and the business transformation looks to be going OK. But the market has question marks over IGA’s viability, with Aldi making inroads. It’s too early to make a call based on today’s result and market reaction. If the share price can rally back above support, at $1.90, it will make a strong case for continuing to hold.

Never assess a stock’s fundamentals without looking at the chart too. Combining fundamental analysis with charting can yield powerful results.

Greg Canavan
Editor, Markets and Money


Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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