Is Loblaw Companies Limited a Strong Buy After its Q3 Earnings Beat?

Loblaw Companies Limited (TSX:L) beat third-quarter earnings estimates on November 18, and its stock has reacted by moving higher. Should you buy now?

| More on:
The Motley Fool

Loblaw Companies Limited (TSX:L), the largest retailer in Canada, announced better-than-expected third-quarter earnings results on the morning of November 18, and its stock has responded by moving higher. Let’s take a closer look at the results and the fundamentals of the stock to determine if this could be the start of a sustained rally higher and if we should be long-term buyers today.

Surpassing analysts’ expectations with ease

Here’s a summary of Loblaw’s third-quarter earnings results compared with its results in the same period a year ago.

Metric Q3 2015 Actual Q3 2015 Expected Q3 2014 Actual
Adjusted Earnings Per Share $0.99 $0.97 $0.90
Revenue $13.95 billion $13.87 billion $13.6 billion

Source: Financial Times

Loblaw’s adjusted earnings per share increased 10% and its revenue increased 2.6% compared with the third quarter of fiscal 2014. The company’s very strong earnings-per-share growth can be attributed to its adjusted net income increasing 10% to $408 million, which it noted was driven by a strong operational performance in its Retail segment, the positive contribution of net synergies related to its acquisition of Shoppers Drug Mart in 2014 and reduced expenses.

Its slight revenue growth can be attributed to its revenues increasing in all three of its major segments, including 2.5% growth to $13.72 billion in its Retail segment, 1.9% growth to $211 million in its Financial Services segment, and 9.4% growth to $187 million in its Choice Properties segment.

Here’s a quick breakdown of eight other notable statistics from the report compared with the year-ago period:

  1. Excluding fuel sales and the negative impact of a change in distribution model by a tobacco supplier, food retail same-store sales increased 3.1%
  2. Drug retail same-store sales increased 4.9%
  3. Drug retail same-store pharmacy sales increased 3.5%
  4. Drug retail same-store front store sales increased 6.2%
  5. Adjusted earnings before interest, taxes, depreciation, and amortization increased 2.1% to $1.02 billion
  6. Adjusted operating income increased 6% to $709 million
  7. Cash flows from operating activities increased 51.7% to $1.07 billion
  8. Free cash flow increased 191.9% to $578 million

Loblaw also announced that it will be maintaining its quarterly dividend of $0.25 per share, and the next payment will come on December 30 to shareholders of record at the close of business on December 15.

Could the stock continue higher and should you be a buyer?

It was a fantastic quarter overall for Loblaw, and the results surpassed analysts’ expectations, so I think its stock has responded correctly by moving higher. I also think this could be the start of a sustained rally higher and that the stock represents a great long-term investment opportunity today, because it still trades at inexpensive forward valuations and because it is a dividend-growth play.

First, Loblaw’s stock still trades at just 19.9 times fiscal 2015’s estimated earnings per share of $3.52 and only 17.2 times fiscal 2016’s estimated earnings per share of $4.08, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 230.8 and the industry average multiple of 28.7.

With the multiples above and its 13.9% long-term growth rate in mind, I think Loblaw’s stock could consistently trade at a fair multiple of at least 20, which would place its shares upwards of $81 by the conclusion of fiscal 2016, representing upside of more than 15% from today’s levels.

Second, Loblaw pays a quarterly dividend of $0.25 per share, or $1.00 per share annually, giving its stock a respectable 1.4% yield. This 1.4% yield may not peak your interest at first, but it is very important to note that the company has raised its dividend for four consecutive years, and its increased amount of free cash flow, including 143.7% year-over-year growth to $1.31 billion in the first nine months of fiscal 2015, could allow this streak to continue in 2016.

With all of the information provided above in mind, I think Loblaw Companies Limited represents one of the best long-term investment opportunities in the market today, and the best long-term investment opportunity in the retail industry. All Foolish investors should strongly consider beginning to scale in to positions over the next couple of weeks.

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 Dividend Stocks

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »

Payday ringed on a calendar
Dividend Stocks

3 Dividend Stocks That Pay Me More Than $54.57 Per Month

These three dividend stocks have done me well over the years, so let's look at how much I've gotten in…

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Royalty: 3 Fabulous Stocks to Buy Now for Decades of Passive Income

Rogers Communications stock and Canadian Natural Resources stock could pay you dividends for decades to come.

Read more »

Dividend Stocks

The Top Canadian REITs to Buy in April 2024

For growth and dividends this April, look to these two REITs that have quite the promising present as well as…

Read more »