Investors can look at market leaders in certain sectors to safeguard their portfolios in case of a market slowdown. In a recession, you want stocks that can hold their own. A grocer’s business fits the bill.
Loblaw Companies Limited (TSX:L) is a leading grocery and pharmacy player in the Canadian market with a network of corporate and independently operated stores in communities across the country. It owns three of Canada’s top consumer brands in President’s Choice, Life Brand, and No Name.
Loblaw reported decent earnings for the third quarter of 2019. Revenue was $14.6 billion, an increase of $336 million or 2.3% from the same period in 2018. Adjusted EBITDA came in at $1.49 billion compared to $1.06 billion in 2018, an increase of $242 million.
Same-store sales in drug retail grew 4.1%, Loblaw’s strongest quarter since the second quarter of 2016. Front store same-store sales grew by 3.1%, and pharmacy same-store sales grew by 5.3% in the third quarter of 2019.
Loblaw’s earnings call with analysts revealed that the company is on track to meet analysts’ expectations for 2019. The call also provided a lot of insight on the company’s future plans. Loblaw is taking steps to digitize multiple processes from billing to pick-up. Its digital pharmacy system, HealthWATCH, is now fully deployed in Ontario and in 740 pharmacies across the country.
Is Loblaw a good bet for 2020?
Loblaw is building an in-store automated picking area that turns 12,000 square feet of less productive space into a high-tech order fulfillment area dedicated to PC Express orders. This pilot will automate picking up the highest velocity items, helping Loblaw’s in-store teams bill more orders faster and more efficiently.
Loblaw has been volatile, to say the least, this year. The stock started off at $60 in January 2019 and is now at $71.72. It hit a high of $75.68 in September 2019. If you had purchased this share in November 2018, you could have got it for $56.55 which would have translated into a gain of over 26% in just over a year.
The latest fall in Loblaw’s price came after Canada’s privacy commissioner said that the company had acquired too much data from customers in the wake of the bread-price fixing controversy. However, that doesn’t seem to have deterred the 12 analysts who track this stock.
Eight have a Buy rating for the stock with the rest recommending a Hold. The average target for this stock is $77.80, which is not bad considering that fears of a recession are increasing by the day. If the stock hits the most optimistic target of $86, an investor could make up to 20% in gains.
The company has said there has been an increase in competition in the discount grocery segment. As one of Canada’s largest grocers, it is well-positioned to lead the charge in this price war.
The stock has given a return of 11% over the last 10 years. Loblaw shares also come with a modest dividend yield of 1.77% and the company has been a consistent dividend payer since 2010. All this makes Loblaw an interesting pick to ride a downturn.
