George Weston Limited (TSX:WN), Canada’s largest food processor and distributor, announced its third-quarter earnings results Tuesday morning, and its stock responded by falling 1.22% in the day’s trading session. The stock now sits more than 11% below its 52-week high of $125.67 reached back in May, so let’s break down the quarterly results and the fundamentals of the stock to determine if now is the time to buy.
Breaking down the Q3 performance
Here’s a breakdown of eight of the most notable financial statistics from George Weston’s 16-week period ended October 7, 2017, compared with its 16-week period ended October 8, 2016:
|Metric||Q3 2017||Q3 2016||Change|
|Loblaw segment sales||$14,192 million||$14,143 million||0.3%|
|Weston Foods segment sales||$668 million||$673 million||(0.7%)|
|Total sales||$14,648 million||$14,605 million||0.3%|
|Adjusted EBITDA||$1,307 million||$1,242 million||5.2%|
|Adjusted EBITDA margin||8.9%||8.5%||40 basis points|
|Adjusted net earnings||$277 million||$266 million||4.1%|
|Adjusted earnings per share (EPS)||$2.14||$2.06||3.9%|
|Free cash flow||$292 million||$541 million||(46.0%)|
What should you do now?
It was a solid quarter overall for George Weston, but nothing in the report stood out as impressive, so I think the slight drop in its stock was warranted. However, the company did perform well in the first 40 weeks of fiscal 2017, with its sales up 1.1% to $36.88 billion, its adjusted EBITDA up 5% to $2.39 billion, and its adjusted EPS up 6.1% to $5.22 compared with the same period in 2016, so I think the downside in its stock will be limited.
With all of this being said, I think George Weston’s stock represents a very attractive investment opportunity for long-term investors for two fundamental reasons.
First, it’s undervalued. George Weston’s stock now trades at just 15.9 times fiscal 2017’s estimated EPS of $6.96 and only 15 times fiscal 2017’s estimated EPS of $7.37, both of which are inexpensive given its current earnings-growth rate and its estimated 5% long-term earnings-growth rate.
Second, it’s an up-and-coming dividend-growth star. George Weston currently pays a quarterly dividend of $0.455 per share, representing $1.82 per share annually, which gives it a yield of about 1.6%. It’s yield may be low, but it’s very important to note that its 3.4% dividend hike in May has it on track for 2017 to mark the sixth consecutive year in which it has raised its annual dividend payment, and I think its steady earnings growth will allow this streak to continue for many years to come.
George Weston’s stock has returned less than 1% since I last recommended it following its second-quarter earnings release in July, but I am still very confident in its long-term potential, so I am re-recommending it today. Foolish investors should take a closer look and consider beginning to scale in to long-term positions.