Metro AG – Update & Playing the Devil’s Advocate
When a stock price moves like this, the fist thought is always: I need to do something, either to sell, or more often, to buy more. This was for instance one of the mistakes I made with Silver Chef, where I Increased my position at least temporary.
What often happened to me when I was holding a stock who dropped was, that I start looking at what happened and looked for reasons to keep or even increase the decision. I looked for more positive information which then would support my initial position. This clearly is the “Confirmation Bias” working in overdrive.
So in the Metro Case I try it differently: I try to look at anything that is not good. I try to play my own “Devil’s Advocate”.
What happened exactly ?
In February during the release of their Q1 numbers Metro management said the following:
• 9% growth (at constant currency) of EBITDA excluding real estate gains in line with FY guidance of c. 10% growth
Then, 2 weeks ago, they came with this “shocker” in form of a profit warning:
At first, this doesn’t read so bad. Instead of an EBITDA growth of 10%, they only expect flat EBITDA because of Russia, which to a certain extent might be understandable when looking at the latest developments between Russia and the rest of the world.
However why this exactly changed within 2 months is not explained. It also interesting that they seemed to have already fully included the potential savings from an ongoing labor conflict in Germany at Real, which to me seems to have been overly optimistic from the beginning.
Nevertheless, the drop of the stock price looks overblown in the beginning. The stock looks cheap and some of the issues should have been already in the stock price. So time to buy more ?
The Devil’ advocate
So this time I am trying to think of everything what I know so far which doesn’t look as good as I thought and why the stock might do even worse in the future:
- Profit warnings often come in series (Bilfinger, Vossloh etc.)
- Reporting of Metro is (still) relatively intransparent
- Metro has been one of the most shorted German companies –> Do the hedgies know more ?
- Metro is active in Russia & Turkey. These are countries where irregularities are rather common –> is the bad outlook in Russia maybe related to a fraud case ?
- Maybe Metro as a German company has been targeted by Russian/Turkey Governement ?
- They clearly failed to turn around Real and seem to have no clue what to do with it
- No insider buys despite drop in share price (CEO bought for 1 mn EUR shares in the beginning at~18 EUR /per share but nothing now
- Chairman of the board has been accused of Insider Trading late last year
- as other retailers, Metro has significant “off-balance” sheet Operating lease liabilities [EUR 5bn) which will come “on balance sheet” soon. Maybe investors are afraid that this will have negative implications
To be honest, already the Q1 report clearly showed that there were issues in Russia. Like for like growth was -10%. With Russia being the main contributor to Metro’s profits (~350 mn EBITDA of a total 1.430 according to a Moscow Capital day presentation), this reduction in sales should lead to even larger reduction in Net profits over the full year.
Further indications of issues in Russia ist this information that a new Russia boss has just been appointed this week.
Experience shows that there is a high probability that a new boss at an already troubled unit might detect further problems. So this is clearly an issue, however the ultimate question is: How much of this is reflected in the stock price and how relevant is it in the long run ?
Edit: In this German article it is mentioned that Russian retailers Magnit & Dixy seem to enter Metro’s wholesale market. More competition is clearly not good for margins.
So what to do now ?
For me, it is currently too early to do something. It is not clear to me if the stock price has overreacted or if more trouble is coming along especially from Russia.
Selling now would be clearly an uninformed decision as well as buying more. The next step will be the release of the 6M report next week. I think I will then still wait and see how Russia develops. If, for instance there would be a further profit warning because of Russia, then this would be a clear sell signal.
Looking back, I clearly overweighted the stock compared to the amount of research I have done into this.