The Toronto Stock Exchange has a positive return of 4% after two quarters in 2023, although the TSX Index’s quarterly advance was a measly 0.28%. As of this writing, 3 of the 11 primary sectors are in negative territory, with energy (-7.2%) having the most significant loss.
With the sub-par performance of Canada’s main stock market so far this year, many stocks from various sectors trade at deep discounts. The TSX bargain stock I’m adding to my basket is Neighbourly Pharmacy Inc. (TSX: NBLY).
The healthcare stock underperforms, although it appears undervalued vis-à-vis its growth potential. Based on market analysts’ price targets, the return potential in 12 months is between 71.5% and 112.5%. The overall return should be higher if you include the 1.1% dividend yield.
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National footprint
Neighbourly Pharmacy takes pride in its diversified national footprint and still-growing network of community pharmacies in Canada. The $714.3 million market cap company has over 290 locations or healthcare hubs nationwide. Management believes that pharmacies are the hub of community healthcare.
As a national operator, Neighbourly sets up healthcare hubs in smaller, underserved markets where competition is less intense. With this orientation, it generates the bulk of revenues from sales of prescription medication and clinical services. Furthermore, patient loyalty is high due to over-reliance on pharmacies for their healthcare needs.
Growth potential
Neighbourly is uniquely positioned to acquire pharmacies in smaller communities. The ultimate goal is to become an acquirer of choice in the highly fragmented retail pharmacy market and develop a legacy of exceptional care. The acquisition targets are independently owned pharmacies (around 11,500 across Canada).
The company acquired 70 pharmacies in the last two fiscal years. Neighbourly can rapidly source, close, and integrate acquisitions seamlessly because of its experience in mergers and acquisitions.
Besides expanding the national footprint, the successful integration gave Neighbourly the purchasing power to drive economies of scale. Its best-in-class IT and business intelligence systems also accelerate the integration of acquired pharmacies.
Fiscal 2023 performance
In the fiscal year that ended March 25, 2023, revenue increased 75.2% year over year to $749.2 million. Because of the significant jump in the top line, the net loss was trimmed down 79.5% to $14.8 million compared to fiscal 2022. In Q4 fiscal 2023, acquired pharmacies in the past 12 months account for 99% of the 69.7% revenue growth. The total acquisitions in fiscal 2023 reached 112.
Neighbourly’s CEO, Skip Bourdo, sees tremendous growth potential in the future. He said, “I am excited about Neighbourly’s long runway, driven by both our robust acquisition pipeline and through the opportunities to drive incremental organic growth and profitability across our existing network.”
Investment takeaway
Neighbourly wants to keep its growth strategy simple: pursue accretive acquisitions and drive organic growth within the growing pharmacy network. It will also leverage its expanding network to drive operating efficiencies and margin expansion.
The stock is on track to becoming a high-growth healthcare stock. Management said the patient-focused or healthcare-first strategy creates a barrier to entry for competitors while providing stable cash flows. Bourdo adds, “We have a full agenda of initiatives and a talented and capable team to accelerate Neighbourly’s growth trajectory forward.”
