With many Canadian grocers signing on to the new rules outlined by the new Grocery Code of Conduct, questions linger as to whether grocery stocks can still deliver solid results. Indeed, inflation has gotten just a bit out of control in recent years. And though inflation is now at a far tamer sub-3% level, consumers still want to see the grocery heavyweights doing more to offer better prices at the grocery aisle.
Of course, inflation has been dropping quickly of late, but it still doesn’t feel like we’ve been dealt a break at the grocery store. In large part, that’s because the damage from the last few years worth of inflation has been done. Though prices could begin to backtrack down here, especially as grocers sign on with the new code of conduct, investors should be ready to play the long game.
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The code of conduct is a step in the right direction
In any case, I think the Code of Conduct is a step in the right direction, not just for consumers but also for the grocers who signed on.
Why? A commitment to improve pricing at the grocery store will beckon in more business. With that comes customer satisfaction and repeat business compared to other competitors. And if firms can improve operating efficiencies further, I do think a scenario exists where grocery firms and consumers can prosper.
Only time will tell if the new rules for grocers lead to soaring prices for the broader basket of Canadian grocery plays. Heck, it’s unclear that the new code will even drive prices down as much as regulators hope.
Some pundits, like Agri-Food analytics lab researcher Sylvain Charlebois, think that the code will “stabilize food inflation over time” in the ballpark of 1.5 to 2.5%. That’s not a ton of difference. Further, it could take time for the relatively modest impact to work its way into prices.
Either way, new investors shouldn’t look to trade the grocery plays over the new code of conduct here, as they could prove rather turbulent as the last “round” of inflation plays out. Instead, it makes sense to consider well-run grocers that can fare well, regardless of the environment ahead.
Also, with inflation winding down and grocers ready to offer shoppers more relief, I’d much rather play the grocery stocks for the extremely long term (think three years at minimum).
Without further ado, here is one intriguing grocery play with an impressive value proposition at the time of this writing.
Metro
Metro (TSX: MRU) stock has already been soaring in recent weeks, thanks in part to some pretty decent results. For the latest quarter, profit slipped by around 14.5%, primarily due to supply chain bets. The good news is that the hit from supply chain investments was already expected going into the big quarterly reveal. In any case, such investments should help Metro sustainably drive margins while allowing it to offer even better prices at stores.
It’s hard to believe, but over the past year, shares of MRU are up a whopping 9.1%. Despite the surge, I still think there’s room to the upside, as the firm looks to improve its supply chain efficiencies further. At 19.2 times, trailing price-to-earnings (P/E) also looks like a relative bargain hiding in plain sight.
Bottom line
New code of conduct or not, Metro stock looks primed for performance as we head into the late-summer months. Its big bets on the supply chain could lead to long-lasting gains that I think may yet to be fully factored into the stock.
