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Why Loblaw Companies Limited Is Down Over 1% Today

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.

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

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