Metcash Limited crashes to 14-year low: Is it a buy for bargain hunters?

The grocery and auto parts distributor will cease paying a dividend as it is likely to post a big $400 million plus net loss this year. But is Metcash Limited (ASX:MTS) worth a punt following its big fall?

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Just when you thought things were starting to turnaround for grocery and auto parts distributor Metcash Limited (ASX: MTS), the stock collapses to a 14-year low.

The savage 18% sell-off in the stock to $1.14 this morning comes on the back of a shock profit warning and suspension of Metcash's dividend for at least 18 months.

Metcash, which is the worst performer on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) this morning, said it will take a $640 million write-down due to "an increasingly competitive trading environment", particularly in food and grocery.

This means Metcash will report a deep loss that could amount to $444 million for the 12 months to end April 2015, compared to consensus forecast of a profit of around $196 million.

The suspension of dividends is also unexpected as analysts were tipping around a 14 cent per share annual payout for 2014-15 and 2015-16.

The bad news is likely to put additional pressure on management to spin-off its automotive business into a separately listed entity.

Such divestments are typically value adding as the spin-off tends to strongly outperform the market over a 12-to-24-month period. Metcash is considering this option.

The news also shows that it is too early to think about a turnaround for embattled supermarket giant Woolworths Limited (ASX: WOW), as it cedes market share to rivals Aldi and Wesfarmers Ltd (ASX: WES), which owns the Coles supermarket chain.

Woolworths' turnaround will likely take a few years to bear fruit and Metcash's downgrade shows the industry is still in the grips of a war.

Coming back to Metcash, management tried to get investors to look at the bright side by reassuring them that the impairment is "non cash" in nature as it largely relates to intangibles and that underlying earnings before interest and tax (EBIT) will be within its guidance of $315 million to $330 million.

The reassurance would work better if Metcash didn't suspend its dividend because a cut to dividend shows that management is not confident about the company's cash flow.

On the other hand, if you assumed that this is as bad as it gets for Metcash (and that's a big assumption), the stock looks like a screaming buy.

Even on a downgraded 2015-16 forecast earnings per share, the stock is trading at under 7x price-earnings. That is the cheapest it's been for at least five years.

Spinning-off its automotive retail business is likely to spark a re-rating in the stock and a decision could be announced when management formally announces its full year results on June 15.

There is longer-term value in the stock around these levels for the patient and risk tolerant investor, but those looking for a less risky investment option that's likely to deliver a big payoff should sign up for free below to see what the experts at the Motley Fool have uncovered.

Motley Fool contributor Brendon Lau has no position in any stocks mentioned. Follow me on Twitter - https://twitter.com/brenlau The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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