Loblaw Companies Limited (TSX:L), Canada’s food and pharmacy leader, announced better-than-expected second-quarter earnings results before the market opened this morning, but its stock has reacted by making a slight move to the downside. Let’s take a closer look at the results and the fundamentals of its stock to determine if this decline represents a long-term buying opportunity or if we should wait for an even better entry point in the trading sessions ahead.
Breaking down the earnings beat
Here’s a quick breakdown of 10 of the most notable statistics from Loblaw’s 12-week period ended on June 17, 2017, compared with the year-ago period:
| Metric | Q2 2017 | Q2 2016 | Change |
| Revenue | $11,079 million | $10,731 million | 3.2% |
| Operating income | $626 million | $517 million | 21.1% |
| Adjusted EBITDA | $985 million | $924 million | 6.6% |
| Adjusted EBITDA margin | 8.9% | 8.6% | 30 basis points |
| Adjusted net earnings | $445 million | $412 million | 8% |
| Adjusted earnings per share | $1.11 | $1.01 | 9.9% |
| Operating cash flow | $872 million | $733 million | 19% |
| Free cash flow | $547 million | $432 million | 26.6% |
| Food retail same-store sales growth | 1.2% | 0.4% | 80 basis points |
| Drug retail same-store sales growth | 3.7% | 4% | (30 basis points) |
What should you do with Loblaw stock today?
I think it was a great quarter overall for Loblaw, and the results surpassed the consensus estimates of analysts polled by Thomson Reuters, which called for adjusted earnings per share of $1.10 on revenue of $11.05 billion. With this being said, I think the decline in its stock makes it an even more attractive long-term buy for two primary reasons.
First, it’s stock trades at attractive valuations. Loblaw stock now trades at just 15.8 times fiscal 2017’s estimated earnings per share of $4.44 and only 14.6 times fiscal 2018’s estimated earnings per share of $4.81, both of which are very inexpensive given its estimated 9.5% long-term earnings-growth rate.
Second, it’s a great dividend-growth stock. Loblaw pays a quarterly dividend of $0.27 per share, representing $1.08 per share annually, which gives it a 1.5% yield. It has raised its annual dividend payment for five consecutive years, and its 4% hike in May has it positioned for 2017 to mark the sixth consecutive year with an increase, and I think its very strong growth of free cash flow will allow this streak to easily continue into the late 2020s.
With all of the information provided above in mind, I think Foolish investors should strongly consider initiating long-term positions in Loblaw today.
