On Tuesday, JPMorgan (NYSE:JPM) upgraded shares of Assai Atacadista (NYSE: ASAI) from Neutral to Overweight, increasing the price target to $17.00 from the previous $15.00. The upgrade was attributed to the company's improved operations, increased visibility, and progress in debt reduction.
Assai Atacadista has demonstrated better than expected operating trends in recent quarters, bolstered by store maturation and internal efficiencies. The company's pricing strategies are showing signs of competitiveness, which could potentially lead to a higher gross margin for the current year, surpassing initial flat projections. Adjusted EBITDA margin levels are forecasted to hit 7.4% in the fiscal year 2024, despite a relatively modest year-over-year sales growth of 14% on an 11% area expansion.
The retailer's leverage ratio has been a point of concern, but it is currently moving in a positive direction. JPMorgan expects Assai Atacadista to achieve adjusted leverage levels of 3.5 times, or 3.3 times under the company's accounting standards, by the fiscal year 2024. This projection aligns with the company's guidance and represents a significant improvement from the 4.2 times (or 3.8 times) leverage in the fiscal year 2023.
The analyst noted that Assai could greatly benefit from a capital structure rebalance, especially since it still holds debt from the acquisition of Exito when it was part of CBD. Furthermore, with major competitors not opening new stores, there is an opportunity for Assai Atacadista to capitalize on market gaps if it had a more flexible balance sheet.
In terms of valuation, the company's stock is considered to be reasonably priced at 13 times the estimated 2025 earnings per share (EPS) and a price/earnings to growth (PEG) ratio of 0.6. This is seen as favorable given the anticipated recovery in EPS.
Adjustments to estimates have led to an 8% increase in the 2024 EPS forecast and a 14% increase for 2025. Assai Atacadista is expected to achieve a compound annual growth rate (CAGR) of 11% in sales, 12% in adjusted EBITDA, and 28% in EPS from 2023 to 2028, driven by the expected trends in de-leveraging.
InvestingPro Insights
As Assai Atacadista (NYSE: ASAI) garners attention with its upgraded status from JPMorgan, current InvestingPro metrics and tips provide a deeper look into the company's financial health. With a market capitalization of $3.55 billion and a robust revenue growth of nearly 22% over the last twelve months as of Q4 2023, Assai demonstrates significant scale and growth potential in the Consumer Staples Distribution & Retail industry. The company's strong free cash flow yield, as implied by its valuation, supports the optimistic outlook presented by JPMorgan.
InvestingPro Tips highlight that Assai Atacadista is expected to be profitable this year and has been profitable over the last twelve months. These insights, along with a price-to-earnings (P/E) ratio adjusted for the last twelve months at 27.37, paint a picture of a company with solid earnings potential. However, it is worth noting that two analysts have revised their earnings downwards for the upcoming period, which may warrant investor caution.
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