After having a sell rating on the stock of French retailer Carrefour (CRRFY) for years, Scott Evans, co-head of equity research at Espirito Santo Investment Bank, now rates it a buy.
Evans admitted that picking stocks in this environment is tough and investors need to take the long view on stocks with deep value and defensive qualities.
Evans said CRRFY doesn’t have defensive characteristics, but it is rapidly becoming a deep value stock. It has gone through its third CEO and has a new one in Georges Plassat. “Plassat has a monumental task in front of him due to the way the French retail market is currently operating with private operators continually eroding margins and continually being very aggressive on market share,” he added.
“From a valuation point of view if you add up the Latin American business, the Asian business, you are almost getting the French business for free. It is not loss making and it is not making much profit, but you get to the time where you say enough is enough and it is time to buy,” Evans said.
Evans believes there is a lot of “self-help” to be done within Carrefour. It doesn’t do much in terms of its own product and it’s pretty weak on buying and loyalty schemes. Successive managements have admitted to these weaknesses without doing much about them, he added. In Evans view it will take 12 months to accomplish a turnaround.
Evans also commented on KingFisher PLC (KGFHY), the British home improvement retailer which also operates in France. Home improvement is fundamentally different from the food and consumer retail markets, according to Evans. Evans questioned whether online retailing erodes the sales of tiles, paints, and lawn trimmers at traditional retailers. His opinion is there is very little effect from online and added that home improvement has become one of the more defensive sectors in retail. He commented further on KingFisher’s growth strategy (video below).
SMA Comment: CRRFY and KGFHY trade on the OTC pink sheets. American Depositary Receipts (ADRs) trading on this market have a foreign security fee tacked on which is typically in the range of 1-2%. This, along with the possibility of large bid/ask spreads, can sap returns. Investors should consider limit orders a prudent course of action in this situation.