What’s happening with Myer?
This week, well-known retailer Solomon Lew revealed he had acquired a 10% stake in troubled department store retailer Myer Holdings Ltd [ASX:MYR] through his majority-owned listed vehicle Premier Investments Ltd [ASX:PMV].
The transaction sparked plenty of theories as to whether Lew intended to make a full takeover offer, or whether he was just buying a blocking stake in case someone else came in and made a bid.
No one really knows the answer to that, although it would surprise me if it were the former. Myer would represent a big purchase for Premier and the business is facing many structural threats. Without merging it with another department store player, such as David Jones, there would be limited synergies from an outright buy.
Still, the purchase makes sense from a pure value perspective. While Myer’s accounting profit doesn’t look all that great, its ‘free cash flow’ (the cash that an actual business owner sees) is in much better shape.
In 2016, for example, free cash flow was around twice as much as reported profit. Perhaps Lew sees this as a case of hidden value in Myer?
What’s happening to MYR’s share price?
MYR’s share price is up marginally today. It rallied strongly last week when news of the big trade first came out. It currently trades at $1.22 per share.
But, since listing in 2009 at $4.10, the investment has been a disaster.
As you can see in the chart below, over the past year, the share price has traded in a broad range, but hasn’t really gone anywhere.
While there is a value argument to invest in MYR, there’s every chance that it might continue to move sideways for some time. There is no point in tying your capital up in stocks that aren’t moving.
What now for MYR?
The downside should be capped for Myer now that the market knows Lew is involved. But it still faces major headwinds. Sales growth is weak and Amazon is about to enter the competitive environment. There are reasons to stay away, despite Lew’s interest.
Also, the charting outlook is unclear. The stock is trendless. The only way to justify a position is to make a bet on a corporate action. And there is no way of knowing whether (or when) such an event will occur.
Never assess a stock’s fundamentals without looking at the chart too. Combining fundamental analysis with charting can yield powerful results.
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