Stimulus Boosts Magazine Luiza Growth Outlook: Corporate Brazil

Brazil’s subsidies to low-income families buying furniture and home appliances are helping to make Magazine Luiza SA the country’s top pick among retailers.

Seven of 11 analysts that follow the company recommend buying the stock, giving it a consensus rating of 4.3 on a scale from one to five, according to survey data compiled by Bloomberg. Cia. Brasileira de Distribuicao Grupo Pao de Acucar is ranked second with a grade of 4.1. Online seller B2W Cia. Digital has the lowest score at 1.8.

Retail sales have grown faster than Brazil’s gross domestic product, which is forecast to expand 2.5 percent in 2013, as low unemployment supports consumer spending. Magazine Luiza, the Franca, Brazil-based retailer focused on selling goods such as beds and refrigerators to lower-income families, is also benefiting from discounted credit provided by a program known as Minha Casa Melhor, or My Better Home, used for furnishing homes financed with government-subsidized mortgages, according to Sandra Peres, an analyst at brokerage Coinvalores.

“The company reported good results in the third quarter, and the outlook for 2014 is very favorable,” Peres said in a phone interview from Sao Paulo. “The My Better Home program should be a big boost for sales, as most of the families eligible for it haven’t signed up yet.”

Share Gain

Magazine Luiza has gained 36 percent in the past three months, the best performance on the BM&FBovespa Small Cap index, which lost 0.5 percent. Peres, who increased the stock to buy from hold in April, said the shares will probably keep rising in 2014 as more home buyers sign up for the program. With a market value of 1.6 billion reais ($678 million) it is among the 15 smallest companies on the 71-member index, according to data compiled by Bloomberg.

Low unemployment should continue to support the retailer’s sales and profit growth, according to Chief Executive Officer Marcelo Silva. Magazine Luiza posted adjusted net income of 25.4 million reais in the third quarter, topping Banco Itau BBA SA’s estimate of 16.7 million reais. Its 2 billion reais of sales in the period exceeded analysts’ forecasts for the first time in six quarters.

More than 217,000 families applied for credit through the My Better Home program and the government granted 1 billion reais of loans with interest rates of 5 percent, according to state-controlled bank Caixa Economica Federal’s website. That’s below the benchmark lending rate of 10 percent and the average cost for bank loans in Brazil of 19.8 percent, data compiled by the central bank show.

Tax Cuts

President Dilma Rousseff, who faces an election next year, said Nov. 20 that Brazil is considering expanding the subsidy program for low-income home buyers. Data from the Cities Ministry show 1.7 million houses were built in the first two phases and 3.75 million more will be constructed or will be under contract to be built by the end of 2014.

The government has lowered taxes and increased spending to revive the economy as above-target inflation and a widening budget deficit erode investor and consumer confidence. Brazil has cut taxes by more than 13 billion reais this year and offered 18.7 billion reais in subsidized credit for consumer goods. Treasury Secretary Arno Augustin said on Nov. 7 that some tax breaks are being scrapped in an effort to shore up public accounts.

‘Optimistic Outlook’

Magazine Luiza’s sales and profit outlook also is improving from integrating retailers it acquired, according to Maria Paula Cantusio, an analyst at Banco do Brasil SA. The company bought Bau da Felicidade, which operates in the southern states of Sao Paulo, Minas Gerais and Parana, in 2011 after its 2010 purchase of Lojas Maia, which has stores in the northeastern part of the country.

“They’ve done some big acquisitions and at first the integration was a bit messy,” Cantusio said in a phone interview from Sao Paulo. “The company managed to turn things around, and now this integration points to a more optimistic outlook.”

Even as Brazil acts to boost consumption through initiatives such as My Better Home, the economy is growing at a slower pace than economists had forecast. Analysts in a weekly central bank survey have cut their 2013 economic growth estimate to 2.5 percent from 3.26 percent at the start of the year. In six of the first nine months of 2013, retail sales growth exceeded 4 percent, according to data compiled by Bloomberg.

Gross domestic product contracted 0.5 percent in the third quarter from the previous three-month period, more than analysts forecast, the national statistics agency said today.

Brazil Unemployment

Silva, the company’s CEO, said slower economic growth won’t be a problem for Magazine Luiza as long as unemployment remains low. Brazil’s jobless rate fell to 5.2 percent in October, a record low for the month, from 5.4 percent in September, according to Brazil’s statistics agency.

“As long as unemployment remains around 5 percent, the scenario will be favorable for us,” Silva said in a phone interview. “The company struggled a bit in 2011 and 2012 while it was dealing with the newly acquired stores. In 2013 and 2014, these investments will mature.”

Silva said the My Better Home program currently doesn’t account for a “relevant” portion of total sales and declined to comment on the impact it may have in the future.

‘Interesting Run’

While Magazine Luiza benefits from the federal program, its recent rally may have pushed the stock close to its fair value, said Eric Conrads, who manages about $750 million of Latin American equities at ING Investment Management.

“It had an interesting run, but I’m not that convinced it’s sustainable,” Conrads said by phone from New York. “It’s probably a wave you can play for an extra few quarters, but at one point it fades.”

The stock, which has seven buy recommendations and four holds, will rise to 10.50 reais in the next 12 months, from 8.10 reais today, according to the average estimate of analysts surveyed by Bloomberg. Magazine Luiza is expected to gain by combining the increased efficiency of its operations following recent acquisitions with the push from Brazil’s stimulus measures, Banco do Brasil’s Cantusio said.

“Prospects are good,” she said. “The company can continue to evolve in a consistent way.”

Before it's here, it's on the Bloomberg Terminal.