Canada’s grocery industry is clearly undergoing a revolution. First it was the Sobey’s take down of Safeway’s western Canadian stores. Now, Loblaw is joining forces with Shoppers Drug Mart. Both transactions took the headlines by storm, and given the market’s reaction, have been smiled upon by investors.
With the front-end of the industry consolidating, what might this mean for the companies that actually produce food? With fewer, bigger players, they are going to have to adapt. Let’s run through some numbers to see which of Canada’s most prominent grocery suppliers might be best suited for your hard earned investment dollar.
Free cash
Generally speaking, the collection of 4 names provided below have a sturdy record of generating free cash. The table below displays the cumulative free cash for each over the past 5 years and compares it to cumulative sales over this period. Only Maple Leaf Foods (TSX:MFI) has a somewhat suspect record.
|
Saputo (TSX:SAP) |
Weston’s (TSX:WN) |
High Liner Foods (TSX:HLF) |
Maple Leaf Foods |
|
| Cash from ops |
$2,453.5 |
$12,312.0 |
$187.0 |
$1,032.8 |
| Cap ex |
561.2 |
5,169.0 |
40.9 |
1,080.9 |
| Free cash flow |
1,892.3 |
7,143.0 |
146.1 |
-48.1 |
| FCF Margin |
6.4% |
4.4% |
4.2% |
n/a |
Source: Capital IQ
Balance Sheet
Given their ability to (more or less) generate free cash, we know that we’re dealing with a collection of quality companies. Let’s check out the respective financial positions to ensure financial risk isn’t a concern. Total debt/equity for each is provided below.
| Company Name |
Total Debt/Equity |
| Saputo |
75.3% |
| Weston’s |
98.2% |
| Maple Leaf Foods |
129.0% |
| High Liner Foods |
180.5% |
Source: Capital IQ
Saputo adds another notch to its belt. Over the past five years not only did the company carry the best FCF Margin, but also has the most financial flexibility in the group.
Valuation
Based on the figures we’ve looked at thus far, it stands to reason that Saputo should trade at a premium to the other names. Let’s see if this holds as we compare some of the multiples at which these names trade in the following table.
| Company Name |
P/E LTM |
P/E Fwd |
P/BV |
P/FCF |
| Saputo |
19.7 |
15.7 |
4.1 |
26.9 |
| Weston’s |
22.6 |
18.0 |
2.1 |
35.8 |
| Maple Leaf Foods |
20.1 |
16.2 |
2.2 |
n/a |
| High Liner Foods |
79.7 |
9.2 |
2.7 |
4.6 |
Source: Capital IQ
Aside from a couple of High Liner’s multiples, the group does not look cheap and relative to the other truly large-cap name in the group, Weston’s, Saputo actually looks reasonably priced. Even though Saputo appears better from a free cash and balance sheet standpoint, its valuation isn’t out of line.
Foolish Takeaway
With retail consolidation occurring in Canada, supplier margins are set to be squeezed. This is another thing to like about Saputo as it has an international focus and generated just 35% of revenues here in the past quarter. Though not cheap, people need to eat, and therefore, keeping the companies that make this necessity into a reality in mind is always a prudent move for investors.
Shoppers Drug Mart is one of the 5 stocks that we’ve profiled in our special FREE report “5 Stocks to Replace Your Canadian Index Fund”. To download this report and learn about the remaining 4, simply click here now.
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Fool contributor Iain Butler doesn’t own shares in any of the companies mentioned at this time. The Motley Fool doesn’t own shares in any of the companies mentioned.
