Why is this market darling down 32.65% in the past year?

by , 13 February 2019
Why is this market darling down 32.65% in the past year?
Between March 2009 and March 2018 investors in Shoprite made a 524.75% total return on their shares in the company - that's roughly double the 260% the JSE Top 40 index produced in the same time.

But in the past twelve months Shoprite lost 32.65% of its market value. And from its March 2018 high it is down 41.21%.
 
  
Shoprite’s meteoric rise and fall
 
 
 
When high quality businesses like this nearly loses half their value in less than a year it is worth having a closer look.
 
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How Shoprite returned 524% to investors in less
than a decade
 
Shoprite powered through the 2007/2008 financial crisis.
 
The company grew revenue by 22.3% in its 2007/2008 financial year with 53% headline earnings per share growth. It actually accelerated revenue growth to 24.5% in the 2008/2009 year.
 
Between 2007 and 2017 Shoprite grew its revenue from R33.51 billion to R141 billion. 
 
Earnings grew from 202.2cps to a massive 1023cps. 
 
This is what happens when expectations overshoot reality
 
Investors came to believe that Shoprite will ALWAYS grow.
 
What’s more, they came to expect that it would always grow at a pace of 20, 30 or even 50%  a year.
 
So, by August 2018 Shoprite’s share price traded on a Price Earnings ratio of 23.06.
 
That means it would take the company 23 years of its current profits to equal its current market value.
 
Now here’s the interesting bit…
 
If you take the average PE ratio of Shoprite shares since 1999, you’d get a number of 18.92.
 
 
 
That means that by August 2018 Shoprite’s share price was around 22% more expensive than its long-term average.
 
Had investors used that day as a selling point they’d have gotten R223 per share – 38.5% higher than the current share price of R161.
 
In the chart showing Shoprite’s PE over time you’ll see that it averaged around 18, with the share hitting expensive levels (above PE of 23.5) a couple of times.
 
Currently it sits halfway between cheap and average…
 
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So why did Shoprite’s share price drop this much – and is now a buying opportunity?
 
Simply put – investors expected too much from the company.
 
No company can do 25% growth into perpetuity.
 
And a PE ratio of 23.5 tells us investors expected 20% plus growth for years to come.
 
Obviously, South Africa had a bad 2018 – with a recession that hit.
 
So in August 2018 Shoprite announced a small decrease of 5% to its earnings (even though revenue grew).
 
Again, that should’ve been a warning sign that it’s high PE ratio made it too expensive…
 
On 29 January 2019 Shoprite told investors interim profits would drop by 16 – 26%.
 
And that’s taken the bottom out of Shoprite.
 
Suddenly investors are giving up on the ‘growth forever’ theory.
 
Now the stock trades on a PE of 17. It’s still not cheap – and I’d like to get it at 15.. But it’s certainly more grounded in reality than it was six months ago…
 
Here’s to unleashing real value,
Francois Joubert,
Editor, Red Hot Penny Shares
 
P.S. Right now I have 5 penny stocks on my radar to buy right now. You can get full details here
 


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