Best buy among consumer goods stocks

Analysts follow as many as 20 stocks, most of which are rated ‘buys’.  Of those buys, an analyst has one or two special favorites seen as most suitable for new buying. Robert Panes, portfolio manager at Toronto-based Richardson GMP, says the climate for consumer goods stocks─especially retail grocery chains─is  quite good  in eastern Canada, which just happens to be Metro Inc.’s primary market.

Mention Metro Inc. (TSX─MRU) as a hot stock and you’re likely to get funny looks. After all, Metro is a retail grocery chain. And Canada’s grocery business is characterized by cutthroat competition and thin margins, right?

Consumer Goods StocksNot necessarily, says Mr. Panes.  And he says the climate for retail grocery chains in Canada is now quite good.

For one thing, he points out, the competitive universe is shrinking. Not only has Target Corp. (NYSE─TGT), a once-feared competitor, fled the Canadian market, but both Metro and rival Sobeys Inc. (TSX─SBY) have closed their unprofitable stores.

Moreover, very few of Target’s former stores will be repurposed as grocery outlets, says Mr. Panes, who notes it’s unlikely that other U.S. grocery chains will come to Canada anytime soon.

“So, actually, it’s a pretty good environment for the retail grocery business,” he observes.

And although Western Canada may now be in a recession, Eastern Canada — Metro’s target market — is in relatively good shape.

Mr. Panes admits that the low loonie will make much of the food that Metro sources in the U.S. pricier. But the company, he adds, will be able to pass on the higher costs to its shoppers.

In the meantime, Metro continues to score with its customers thanks to the high quality of its fresh produce.

Another plus? Metro’s low valuation. Although it now trades at 15.2 times its estimated earnings for fiscal ’16, its U.S. rivals weigh in at roughly 17.1, while rival Loblaw Cos. Ltd. (TSX─L)  tips the scales at 16.8, Mr. Panes notes.

But Metro is even cheaper when one excludes its stake in Alimentation Couche-Tard Inc. (TSX─ATD.B), the Quebec-based convenience store chain.

When that stake, worth roughly $8.80, is backed out, Metro is actually worth $26.79 a share. And when this is divided by the $2.26 in earnings that Mr. Panes has forecast for the company in fiscal ’16, its P/E comes in at 11.9. So, Metro is a great bargain.

For Mr. Panes, Metro is a best buy — one with a 12-month price target of $40, as well as a fiscal ’15 earnings estimate of $2.03 a share.

Canada’s only major retail grocery chain headquartered in Quebec, Metro boasts a total of nearly 660 stores there and in Ontario. In addition to its own name, the company does business under the Food Basics, Metro Plus and Marche Richelieu brands.

For the 16 weeks ended July 4, Metro’s net earnings grew to $163.5 million or $0.64 a share, from $144.5 million, or $0.54 a share, for the similar period in fiscal 2014.

Sales, not surprisingly, were also higher, rising to $3.8 billion from $3.6 billion, while pre-tax earnings increased to $213.7 million from $192.9 million.


Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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