Loblaw (TSX:L) is Canada’s biggest grocery store company. Best known for its large grocery stores, which operate under names like “Loblaw” and “Atlantic Superstore” (they vary province to province), the company sells an outsized share of the food Canadians eat.
Loblaw boasts 2,500 stores nationwide, a recognizable brand, and $59 billion in annual sales. It’s a true giant among Canadian retailers.
So, Loblaw provides Canadians with an essential good and is the dominant player in its space. So far so good. The company looks like a legitimate one that will survive long term. However, that’s not actually enough to say that its stock will be a good investment. To be a good investment, a stock needs to be priced reasonably compared to the underlying company’s assets and future earnings. If it is, then it’s a buy. In this article, I will explore three key factors that determine whether or not Loblaw is a buy, then finally share my personal conclusion on the matter.
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Valuation multiples
Going by multiples, Loblaw is moderately expensive. At today’s prices, Loblaw trades at:
- 21.5 times adjusted earnings.
- 25 times reported earnings.
- 0.9 times sales.
- 5 times book value.
- 10 times cash flow.
This is certainly no bargain basement stock. However, it is cheaper than the S&P 500 and valued at about “average” multiples for the TSX Composite Index. So if it’s profitable enough and growing enough, it may be worth it.
Profitability
Loblaw is a profitable company; however, like most grocery stores, its margins are relatively slim. Some key profit metrics for the company include:
- A 32% gross profit margin.
- A 6.7% operating income margin.
- A 3.7% net income margin.
- A 4% free cash flow margin.
- A 20% return on equity.
The return on equity is pretty good; however, all of the company’s margins are quite low. This implies that if costs went up dramatically, Loblaw would have to either accept lower margins or try to pass costs onto consumers. With inflation being as big a concern as it has been in recent years, that latter option would probably come with some political pushback.
Growth
Next up, we can look at Loblaw’s growth metrics. In the trailing 12-month period, Loblaw grew its revenue, earnings, and free cash flow at the following rates:
- Revenue: 2.7%.
- Earnings: 12.4%.
- Free cash flow: 10.6%.
The revenue growth rate was pretty low, but on the other hand, the FCF and earnings growth rates were pretty adequate for a company at Loblaw’s multiples. It looks like the company is successfully exercising cost discipline. Now let’s look at the rates Loblaw has compounded at over the last five years:
- Revenue: 4.9%.
- Earnings: 20%.
- Free cash flow: 12%.
These growth rates are actually quite adequate, indicating that Loblaw is a growing enterprise.
Verdict: Depends on the price you pay
Although Loblaw is certainly a profitable and growing enterprise, its stock is fairly richly valued for the kinds of margins and growth rates it’s been doing lately. I’d be comfortable buying it at 10 times earnings, but not at today’s price.
