George Weston Limited (TSX: WN) is Canada’s largest food processor and distributor, and its stock has the potential to be one of the market’s top performers over the next several years. Let’s take a look at three of the top reasons why you should consider buying shares today.
- An impressive brand portfolio
George Weston has grown into much more than the bread company it started as in the late 1890’s. It is now a family of companies that include some of North America’s most popular brands. Here’s a list of the companies it owns and operates, and a brief overview of what they do:
- Weston Foods: A leader in the North American baking industry, producing fresh, frozen, and specialty bakery products. Its brands include Weston, Wonder, D’Italiano, Country Harvest, Gadova, and Ready Bake.
- Loblaw Companies Limited (TSX: L): Canada’s largest retailer, providing the nation with grocery, pharmacy, health, and apparel products, as well as banking and wireless mobile products and services. Its brands include Loblaws, Valu-Mart, Fortinos, Provigo, Extra Foods, Atlantic Superstore, and Shoppers Drug Mart.
- Shoppers Drug Mart: The largest licensor of full-service retail drug stores was acquired by Loblaw for $12.4 billion in 2014. Its brands include Shoppers Drug Mart, Pharmaprix, MediSystem Pharmacy, and Murale.
- Choice Properties REIT: An owner, manager, and developer of retail and commercial real estate across Canada. It currently owns over 36 million square feet of gross leasable area and consists of over 430 properties, many of which are anchored by supermarkets, like Loblaw’s family of brands.
- President’s Choice Financial: A banking service offered by Loblaw through a division of the Canadian Imperial Bank of Commerce. It offers a credit card that generates rewards points and personal banking services to its customers.
- Double-digit earnings and revenue growth to support a higher stock price
George Weston released better-than-expected fourth-quarter earnings on March 5, but its stock has responded by falling over 3% in the weeks since. Here’s a breakdown of 10 of the most notable statistics from the report compared to the year-ago period:
- Net income increased 57% to $212 million
- Earnings per share increased 61.2% to $1.58
- Total revenues increased 48.2% to $11.73 billion
- Revenue increased 49.4% to $11.4 billion in its Loblaw operating segment
- Revenue increased 13.6% to $469 million in its Weston Foods operating segment
- Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 84.5% to $1.02 billion
- Adjusted EBITDA margin expanded 170 basis points to 8.7%
- Operating profit increased 65.4% to $622 million
- Cash flows from continuing operations increased 34.1% to $1.09 billion
- Free cash flow increased 42% to $504 million
The company noted that its very strong performance could largely be attributed to Loblaw’s acquisition of Shoppers Drug Mart, which closed in March 2014 and contributed $3.05 billion of revenue and $290 million of operating profit in the fourth quarter. However, it is also worth noting that excluding this acquisition, George Weston’s revenues still increased a solid 9.6% to $8.68 billion.
- The stock trades at inexpensive valuations
At today’s levels, George Weston’s stock trades at just 19 times fiscal 2014’s adjusted earnings per share of $5.35, only 17.5 times fiscal 2015’s estimated earnings per share of $5.79, and a mere 16.6 times fiscal 2016’s estimated earnings per share of $6.11, all of which are inexpensive compared to its five-year average price-to-earnings multiple of 27.7.
I think the company’s stock could consistently command a fair multiple of at least 24, which would place its shares upwards of $138 by the conclusion of fiscal 2015 and upwards of $146 by the conclusion of fiscal 2016, representing upside of more than 35% and 43% respectively from current levels.
Does George Weston belong in your portfolio?
George Weston represents one of the best long-term investment opportunities in the market today, because it is home to some of Canada’s most popular brands, because its stock has the support of double-digit earnings and revenue growth, and because its stock trades at inexpensive current and forward valuations. Foolish investors should take a closer look and strongly consider establishing positions today.
