Is This Large-Cap Canadian Heavyweight Undervalued?

Is George Weston’s diversified business portfolio enough to keep investors interested?

| More on:
You Should Know This

Image source: Getty Images

Long-term investors are always on the lookout for stocks that are trading lower than their intrinsic value. This strategy generally bodes well, as value stocks outperform broader markets more often than not.

We’ll look at one such domestic giant that has strong fundamentals to gauge if it is trading at an attractive valuation. George Weston (TSX:WN) is a well-diversified company. Its business segments include Loblaw, Weston Foods, and Choice Properties.

We know that Loblaw provides a slew of services in retail (grocery, merchandise, pharmacy, health & beauty) and financial services (retail banking, insurance, and credit card services) space. Weston Foods is a fresh bakery business in North America.

Loblaw and Weston Foods hold cash, short-term investments, and a direct investment in Choice Properties, which is a real estate investment trust. George Weston generates a majority of sales from Loblaw (around 96%, followed by Weston Foods and Choice Properties.

The company has a market cap of $16 billion and an enterprise value of $41.69 billion. At the end of the last quarter, the company reported a debt balance of $20.9 billion. The stock is currently trading at $103.73 and has returned 11% in the last year, grossly underperforming the S&P 500, which has gained 27% in the last 12 months.

Company to experience sales growth

Analysts expect George Weston sales to touch $50.12 billion in 2019 — year-over-year growth of 3.2%. In 2020, sales growth will accelerate marginally by 3.5% to $51.9 billion, according to analyst estimates.

This means George Weston is valued at 0.32 times forward 2019 revenue (in terms of market cap) and 0.84 times forward sales (in terms of enterprise value). Further, analysts also expect the company to increase earnings growth by 8.3% in 2019, 4.9% in 2020, and by an annual rate of 5.7% in the next five years. Comparatively, the stock is trading at a forward price-to-earnings multiple of 13.3, which might seem reasonable after accounting for a dividend yield of 2%.

George Weston stock has returned just 8.7% in the last five years, which will not impress investors. Fool contributor Chen Liu has forecast the stock’s intrinsic value at $222.22 per share, which means that the stock is trading at a significant discount.

In the last reported quarter, George Weston managed to increase sales by 2.44%, while adjusted EBITDA and net earnings rose by 19.4% and 35.6%, respectively.

However, its cash flow at the end of Q3 stood at $1.49 billion, down almost 20% compared to the prior-year period. This decrease was attributed to an increase in cash used for financing activities by Choice Properties. These financing activities included repayment of debt, higher repayment of short-term obligations, and higher repurchases of Loblaw’s common shares.

The company’s high debt balance will remain a cause of concern for investors, as it provides limited room to increase dividend payments going forward. George Weston ended the September quarter with an operating cash flow of $3.7 billion. But it also paid $588 million to shareholders in the form of dividends in the first nine months of 2019.

As seen above, Gorge Weston is a well-diversified company, which means it should be able to hold its own in a downcycle if the recession hits markets in 2020. While the stock is not overvalued, it does not seem an exciting pick for value investors considering its tepid performance in the last few years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »