As the Kingfsher share price collapses, it is too early to buy the dip

Kingfisher (LON: KGF) share price continued its sell-off as concerns about the company continued. The stock dropped to 211p, the lowest level since November 3rd 2022. It has plunged by more than 38% from the highest point during the pandemic.

Kingfisher, the heavily shorted parent company of ScrewFix and B&Q, published another set of weak financial results. The company’s sales jumped by 1.1% in the first half of the year to £6.8 billion.

Its gross profits dropped to £2.45 billion as the cost of doing business jumped. Also, its operating profit margin slipped to 36.3%  while its statutory post-tax profit crashed by more than 33% to £237 million. Kingfisher maintained its dividend at 3.80p and unveiled a new £300 million share buyback.

Meanwhile, the company’s balance sheet remained under pressure as its net debt jumped from £1.8 billion to £2.1 billion. Its net debt to EBITDA stands at 1.6x. Most importantly, the company issued a weak forward guidance.

Kingfisher is going through major challenges as its key markets go through a slowdown and a cost of living crisis. In the UK, economists expect the upcoming data to show that the country’s consumer inflation remained above 5% in August.

Higher inflation leads to weak discretionary spending. In a statement, the company’s CEO said:

“Trading in the UK & Ireland continues to have positive momentum. However, to better reflect our performance in H1 and the trading environment in our markets, we have updated our profit guidance for this year.”

The Kingfisher share price crash has left a company that is relatively undervalued. It has a market cap of over 4 billion against expected profit before taxes of 590 million. The company is also managing its debt well and is continuing its capital returns. Therefore, a case for buying the stock can be made from a fundamental perspective.

The daily chart shows that the Kingfisher stock price has been in a strong bearish trend in the past few years. It crossed the important support level at 216.8p (July 6 and December 19 2022 low) on Tuesday as traders reflected on its weak earnings. 

Kingfisher has crashed below the 50-day and 25-day moving averages, signaling that bears are still in control. The Relative Strength Index (RSI) has dropped to the oversold level. Therefore, the shares will likely continue falling in the near term as investors reflect on the weak revenue and profitability growth. In the long-term, however, the shares will likely resume bounce back.

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