Metro Inc (TSX:MRU) has delivered a decent performance in the last five years. In that period, its stock has risen 82% while paying a modest dividend (1.4%). Overall, the total return has been decent.
As of Friday’s market close, Metro stock was in the midst of a minor dip. Closing at $104.69, it was down 2.2% from its prior high — just a few pennies below $110. So, the stock is a little cheaper than it was at all-time highs. Given this, it’s worth asking whether the stock is a worthy dip buy while it’s below $110.
Source: Getty Images
What Metro does
Metro is a network of grocery stores and pharmacies operating in Ontario, Quebec, and New Brunswick. The company competes with Loblaw and Sobeys in these markets. The basic economics of the grocery business is well known: buy food from a wholesaler and try to sell it at a higher price. Be this as it may, Metro has some differentiators. Its regional focus makes it able to quickly adapt to local tastes. It has its own brands, similar to President’s Choice and Our Compliments. Finally, it is a leaner operation than Loblaw or Sobeys (Empire), with lower costs. These factors might give Metro an edge over its larger competitors.
One nice thing about Grocery stores is that they are inflation-resistant. Generally, they are quite able to pass rising input prices on to customers. At a time when Canada and the U.S. are both running huge deficits, that’s a factor worth keeping in mind: immense government spending tends to fuel inflation.
Growth
Over the last few years, Metro has delivered what could be called “slow but steady” growth. In the trailing 12-month period, its revenue increased 2.3%, its earnings increased 7%, and its free cash flow increased 32%. Over the last five years, its revenue compounded at 5%, its earnings compounded at 6% and its free cash flow compounded at 9%. These are not exactly explosive rates of growth here, but they are pretty consistent.
Profitability
Next up, we have profitability. Metro scores pretty well here, too. The company’s gross margin is 19%, its net margin is 4.6%, its free cash flow margin is 3.3%, and its return on equity is 14.3%. These metrics might not look sky-high, but it’s important to remember that grocery stores are famed for having razor-thin margins, and these margins could be better described as “butter knife thin.” So, MRU is comparatively profitable for its sector.
Valuation
Last but not least, we can consider the valuation. Metro’s multiples are about typical for the TSX right now. Examples include the folllowing:
- Price-to-earnings: 23.
- Price-to-sales: 1.08.
- Price-to-book: 3.2.
- Price-to-cash flow: 14.35.
Taking growth into account, Metro certainly isn’t a “dirt-cheap” stock, but it isn’t outrageously pricey either. So, I’d say those buying below $110 will not get a terrible result.
Foolish bottom line: Metro Inc
Going by financials and valuation multiples, Metro stock is a so-so opportunity — not pricey, but not cheap; not growing fast, but not shrinking; not ultra-profitable, but profitable for a grocery store. On the whole, I’d pass, but I wouldn’t consider those buying the stock crazy. Do remember my point about inflation from earlier in the article, though: North American governments are spending like crazy, and in periods of elevated inflation, grocery stores really shine. So, maybe MRU merits further research
