Loblaw Companies Limited (TSX:L) is a Canadian grocer that owns over 1,000 supermarkets under 22 regional and market segment banners. The company owns many terrific brands like President’s Choice, No Name, Joe Fresh, T&T Supermarkets, Exact, Seaquest, and Teddy’s Choice.
The company has been facing some upside resistance for almost two years now, as the defensive sector has been one of the least attractive places for investors to put their money in. Sure, President Trump is likely to strengthen the U.S. economy, and the Canadian market is likely to benefit from this, but it still doesn’t make sense for investors to dump their defensive holdings in favour of cyclical names.
Loblaw knocked one out of the ballpark in its recent Q4 2016 earnings report. Food prices are on the decline, and it was expected that Loblaw would face some serious pressure in the last quarter, so it came as a surprise to everyone when the company reported a profit increase of 57% to $201 million. Revenue also increased from $265 million to $11.3 billion. On an adjusted basis, the company had earnings per share of $0.97, which was considerably higher than last year’s earnings per share of $0.87.
The decrease in food prices meant more happy customers that ended up buying more food. It’s truly remarkable how the company was able to perform well given the huge headwind of decreasing food prices. I believe the rally in the stock was warranted, and it could be on a sustained rally to higher levels.
The food business is tough. Margins are razor thin, so operations have to be running smoothly, otherwise there would be huge problems. The management team at Loblaw is able to adapt to a changing environment, and this is why the company has been so successful lately. Count me as impressed.
The company is firing on all cylinders by investing in initiatives that will drive same-store sales for the long run. Loblaw CEO and chairman Galen G. Weston believes that “Click & Collect” will be the future of the grocery business. I see myself using this platform, as it’ll save me a ton of time, but what about home-delivery services?
Mr. Weston has been considering home delivery as an initiative, but he believes that consumers are more inclined to drop by their local Superstore to pick up their food right away, instead of staying in their homes while waiting for their groceries to arrive. I believe there’s a market for both methods, but I think “Click & Collect” is definitely a terrific start for the company.
The stock trades at a forward price-to-earnings multiple of 14.4 and a price-to-book multiple of 2.2, both of which are ridiculously cheap when you consider the huge growth prospects like “Click & Collect” and Shoppers Drug Mart’s expansion potential. The management is top notch, so I’d scoop up shares now while the defensive sector is still weak. This is how real money is made. Buy wonderful businesses that are experiencing a sector-wide sell-off.
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Fool contributor Joey Frenette owns shares of Loblaw Companies Limited.