George Weston (TSX: WN) operates through its three reportable operating segments, which are Weston Foods, Loblaw, and Choice Properties.
Weston Foods includes a leading North American bakery that offers fresh and frozen bread, rolls, cakes, donuts, pies biscuits, and alternatives.
Loblaw has two reportable segments, which are retail and financial services. It provides Canadians with apparel, general merchandise, grocery, pharmacy, health and beauty, financial services and wireless mobile products and services.
Choice Properties owns, manages, and develops a portfolio of commercial retail, industrial, office, and residential properties across Canada.
George reports a market capitalization of $16.07 billion with a 52-week low of $86.72 and a 52-week high of $113.94.
Intrinsic price
Based on my calculations, using a discounted cash flow valuation model, I determined that George has an intrinsic value of $222.22 per share. Assuming less-than-average industry growth, the intrinsic value would be $218.37 per share, and higher-than-average industry growth would result in an intrinsic value of $226.20 per share.
At the current share price of $104.41, I believe George is significantly undervalued. Investors looking to add a grocery and real estate company to their TFSA or RRSP should consider investing in George.
George has an enterprise value of $51.2 billion, which represents the theoretical price a buyer would pay for all of George’s outstanding shares plus its debt. One of the things to note about George is its leverage, with debt at 51.5% of total capital versus equity at 48.5% of total capital, which is not ideal.
Financial highlights
For the 40 weeks ended October 5, 2019, the company reported a strong balance sheet with $4.4 billion in positive retained earnings. This is a good sign for investors, as it indicates the company is reinvesting its surpluses back into the company to fuel growth.
The company has cash and equivalents of $1.5 billion on short-term debt obligations of $3.9 billion, which means it does not have enough cash on hand to cover its current liabilities. This is not a concern given the company’s access to $2.5 billion in credit facilities (which were 13% drawn as at December 31, 2018).
Overall revenues are up noticeably to $38 billion during the period compared to $37 billion the prior year (+3%), which was a driving force behind the company’s reported operating income of $2.2 billion, up from $1.9 billion in 2018. Pre-tax income of $543 million, down from $1.2 billion in 2018 due to financing and interest expense.
The company’s investing cash flows improved significantly year over year due to absence of the $1.7 billion cash outflow for the acquisition of Canadian Real Estate Investment Trust in 2018.
Senior management takes a proactive approach to debt management, as indicated by $1.6 billion in debt pay-downs during 2019 and a $2.2 billion pay-down in 2018. This is offset by long-term debt draws of $3.9 billion in 2018 and $1.3 billion in 2019.
The company also has a normal course issuer bid in place of which George Weston spent $774 million on the purchase and cancellation of outstanding shares for Loblaw during this period.
Foolish takeaway
Investors looking to buy shares of a grocery and real estate conglomerate should buy shares of George. At a current price of $104.41 compared to its intrinsic value of $222.22, investors have the potential to gain 113% by investing in George.
The company reports a solid balance sheet with positive retained earnings complemented by growing revenues. Management is also adept, as indicated by its proactive approach to debt management and the exercising of its normal course issuer bid.
This is a solid choice for RRSP and TFSA investors.
