The collapse of prices: should one buy cheaper shares of Magnit

Shares of Magnit continue to fall in price after a sharp collapse on Friday, October 20. Will the company of Sergey Galitsky win back the trust of investors and restore its positions?
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Since last Friday, October 20, the shares of the retailer Magnit have lost more than 16% in price, dropping from 9,500 rubles to 7,900 rubles. The drop in quotations of the retail giant was the result of its weak financial results for the third quarter of 2017. The market was shocked by the drop in net profit for the reporting period by 53.3% to the level of a year ago.

Expectations of analysts were much more optimistic. According to Bloomberg, market participants expected that the indicators of EBITDA and net profit from Magnit will be at least 25% more. The situation was aggravated by the fact that the retail network reduced the forecast for revenue growth for 2017 to 8-10% from the previous 9-11%.

Since the collapse of the quotes of "Magnet" was caused by fundamental reasons, in the current situation, one should not expect a rapid recovery in the prices of its shares. However, the retail network still does not deserve a sharply negative forecast: it is worthwhile to observe the dynamics of the company's development in the next quarter and evaluate the management's actions against the background of a falling profit.

It should be remembered that the entire Russian retail continues to experience the effects of the food embargo, the devaluation of the ruble and the reduction of the average check in the country. The presence of problems and the drop in profits were noted this year among other large retailers. But the operational indicators of Magnit were influenced not only by the unfavorable macroeconomic situation, but also by the specific features of its development strategy.

First of all, the geographical location of Magnit stores: most of the points work in small towns, where real incomes of the population have fallen much more, and purchasing power has decreased even more than in the regional centers and the capital. His contribution was made by the launch of the shop redesign program, which, after that, led to the closure of many outlets in the third quarter of 2017. Also, the business of "Magnit" was influenced by the costs of building a plant for growing champignons and supporting a number of social projects.

To understand what are the immediate prospects of Magnit, you need to wait for the results of the rebranding. For example, the closest competitor of the company - X5 Retail Group - rebranded Pyaterochka stores earlier, and now the retailer shows positive results, which are directly related to the new positioning of stores.

In the current conditions, the course of "Magnit" on vertical integration looks like a good idea. Own plant for growing mushrooms will bring not only understandable bonuses to the company, but will also open up prospects for entering other markets. .

Also do not forget that the owner of "Magnet" Sergei Galitsky - one of the most outstanding, who knows how to find non-standard solutions.

. This strategy is too costly for the company, and in the face of falling consumer demand it is not obvious that new formats will be profitable.

The fall of the "Magnit" shares will not cause a chain reaction in the consumer sector of the stock market. The behavior of quotations of securities of other retailers will depend on their financial performance. Since the situation in retail, especially in the regions, is now ambiguous, the slowdown in the growth of retail chains is very likely. Decreasing purchasing power and sanctions do their job, therefore, it is possible that soon all retailers will look for additional niches for development and will start, as in the case of Magnit, into adjacent markets - logistics, agriculture and consumer goods production.