Could This Industry Leader Rally Another 45% in 2015?

Loblaw Companies Limited’s (TSX:L) stock has risen more than 45% in 2014. Will it outperform the market again in 2015?

| More on:
The Motley Fool

Loblaw Companies Limited (TSX: L), the largest food retailer in Canada, has been one of the market’s best performing stocks in 2014, rising more than 45% compared to the TSX Composite Index’s return of just over 7%. Strong earnings growth and a recent acquisition have played major roles in the company’s rising share price and I think it could continue much higher from here.

Let’s take a look at three of the primary reasons Loblaw could be one of the top performing stocks in 2015.

1. Strong earnings to support a continued rally

On November 12, Loblaw released third-quarter earnings and its stock has risen over 7% in the weeks since. Here’s an overview of what the company accomplished during the quarter compared to the year-ago period.

  • Adjusted earnings per share increased 23.3% to $0.90.
  • Revenue increased 35.9% to $13.6 billion, largely due to its recent acquisition of Shoppers Drug Mart.
  • Excluding the impact of Shoppers Drug Mart, same-store sales increased 2.6%.
  • Same-store sales at Shoppers Drug Mart increased 2.5%, including pharmacy sales increasing 3.5% and front-end sales increasing 1.6%.
  • Adjusted EBITDA increased 56.9% to $1 billion.
  • Adjusted operating profit increased 74.2% to $669 million.
  • Generated $216 million of free cash flow.

In the first nine months of fiscal 2014, Loblaw’s adjusted earnings per share increased 17.9% to $2.24 and its revenue increased 26.1% to $31.2 billion, putting it on track for a record-setting yearly performance.

2. Inexpensive current and forward valuations

At current levels, Loblaw’s stock trades at 21 times its trailing-12-months earnings per share of $2.97, which seems fair given the company’s long-term growth rate. However, the stock’s valuation gets very enticing on a forward basis, as it trades at less than 18 times fiscal 2015’s estimated earnings per share of $3.48.

I think Loblaw’s stock could consistently command a multiple of approximately 20 going forward, which would place shares upwards of $69 by the conclusion of fiscal 2015, representing growth of more than 10% from today’s levels.

3. A stable and growing dividend

Lastly, Loblaw has one of the most stable dividends in the market today, which can be attributed to its ample free cash flow generation. The company has also shown a strong dedication to increasing its dividend as of late, as it has raised its annual payment three times in the last three years. Loblaw currently pays an annual dividend of $0.98 per share, which gives it a very respectable yield of approximately 1.6% at current levels.

Is it time to buy shares of Loblaw?

Loblaw is the largest food retailer in Canada and its stock has widely outperformed the overall market in 2014, which can be attributed to strong financial growth, primarily due to its recent acquisition of Shoppers Drug Mart. Year-to-date in fiscal 2014, the company’s earning per share have increased 17.9%, revenue has increased 26.1%, and the stock has responded accordingly by rallying more than 45%.

Even after the stock’s rally of nearly 50% in 2014, I think Loblaw represents an intriguing long-term investment opportunity, because it has strong earnings to support a continued rally, trades at inexpensive forward valuations, and has a stable and growing dividend. With all of these factors in mind, I think long-term investors should strongly consider initiating positions in Loblaw today and adding to them on any weakness provided by the market.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

More on Investing

question marks written reminders tickets
Tech Stocks

Nvidia’s Historic Stock Split: Will Investors See Bigger Gains?

Nvidia's (NASDAQ:NVDA) record 10:1 stock split entices many investors in several important ways. But some myths aren't technically correct.

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Retirement

Retirees: 2 TSX Dividend Stocks That Have Raised Payouts Annually for Decades

These stocks offer high yields and should continue to raise their payouts.

Read more »

TFSA and coins
Investing

5 Canadian Stocks With a Real Chance of Tripling Your TFSA’s Value

TFSA balances can triple in value with five Canadian stocks that have delivered outsized gains in recent years.

Read more »

A worker drinks out of a mug in an office.
Tech Stocks

Want $1 Million in Retirement? 3 Stocks to Buy Now and Hold for Decades

Growth stocks such as Docebo and Celsius Holdings should help you generate outsized gains in the upcoming decade.

Read more »

Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline
Dividend Stocks

This 8% Dividend Stock Pays Cash Every Month

Earn monthly cash of $154 with this 8% dividend stock.

Read more »

A miner down a mine shaft
Metals and Mining Stocks

Should Investors Buy the Correction in Lundin Mining Stock?

Lundin (TSX:LUN) stock has fallen by 10% in the last few weeks, but so has the price of copper. Coincidence?…

Read more »

Metals and Mining Stocks

Best Stocks to Buy in May 2024: TSX Materials Sector

A TSX materials sector ETF could help investors gain cheap diversified exposure to the hot sector's stocks – so will…

Read more »

man is enthralled with a movie in a theater
Investing

Should You Buy Cineplex While it’s Below $9?

With analysts expecting a significant recovery in the second half of 2024, is this the last chance to buy Cineplex…

Read more »