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Which Buy Should You Eat Up After Earnings: Loblaw (TSX:L) or Metro (TSX:MRU)?

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It might not be the first place you look, but grocery stocks can be some of the most consistent performers in the marketplace (pardon the pun).

But not all are created equal, and the larger the businesses, the more likely it is you’ll see an increase in both your share price and the dividends that go along with them.

So, that’s why today I’ll be comparing two heavy hitters: Loblaw Companies (TSX:L) and Metro (TSX:MRU). Both stocks have had earnings released recently, so which is the better option for your portfolio?

Size matters

Loblaw is Canada’s largest grocery chain, owning four of the top-10 brands, which now includes Shoppers Drug Mart. It targets a wide range of consumer, and has been rewarded through its loyalty program.

Its latest earnings were as big as its size, posting 3.1% revenue increase of $10.66 million, operating income of $451 million, up 20%, free cash flow of $419 million, and adjusted EBITDA of $1.04 million, up 42%.

But the company also posted adjusted diluted net earnings that weren’t so stellar at $0.78 per common share, a decrease of 3.7%. Net earnings reached $198 million, a decrease of $14 million.

Yet this allowed the company to repurchase 3.7 million common shares in the first quarter of 2019. That news should make investors happy, as it means the company believes it’s headed for more growth. Analysts tend to agree, giving the next 12 months an estimate between $70 and $85 per share.

So, while its earnings per share are down, investors might see this as an opportunity to buy before a boost, as the company has already increased about 30% since the beginning of 2019. In the meantime, they’ll receive a quarterly dividend with an annual yield of 1.79% at the time of writing.

Is fresh best?

Metro may not be the largest grocery and drugstore operator in Canada, but it’s still doing all right with about 10% of the market share. The company focuses on being the one you go to for the freshest and most diverse products. It may also become “Metro, the most modern grocer,” as the company is investing $400 million into its facilities to modernize and bring on more in-store traffic.

But while these might be interesting investments, they won’t continue to drive traffic over the long term. Grocery retail is a competitive industry, and in the next decade, Metro’s costs may outrun its capital. And while in-store modernization is fun, it doesn’t beat ordering online, where Loblaw has managed to achieve great success.

Its earnings weren’t bad, but they weren’t great either. Revenue hit $3.7 billion just narrowly missing analyst estimates, but sales rose to $3.7 billion, an increase of 27.7%. EBITDA hit $294 million, up 41.1%, and earnings $121.5 million, up 12.02%. So, things remain relatively steady for this stock and should continue that way at least over the next 12 months. Analysts are estimating growth to $50-55 per share from its current price of $48.67 at the time of writing.

Bottom line

The main difference here is isn’t the size; it’s the power behind Loblaw. It has managed to reach every type of consumer and collect data on how to make them loyal to the Loblaw brand, whichever one that may be. It’s also managed to figure out what’s important for consumers and invest in those areas, whereas Metro is still playing a bit of catchup, only having data from 2009.

Overall, Loblaw has a strong future ahead, and while Metro’s should remain stable, it isn’t likely to become a strong stock like Loblaw over the long term. If it’s my money, I’d pick Loblaw every time.

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Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned.

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