One of the best-performing stocks on the TSX over the course of the past year has been retailer Loblaw (TSX: L). Shares of the dominant Canadian retailer have surged more than 40% over the past year at the time of writing, and appear to be headed in only one direction – up.
What’s interesting is the nature of the move with respect to Loblaw’s underlying business model and fundamentals. As a grocery retailer, Loblaw’s margins are a far cry from other high-growth tech stocks. And its revenue growth profile in theory should be relatively limited on this basis as well.
Let’s dive into whether Loblaw is still a buy below the $250 level, and if this level is achievable over the course of the next year. Based on the direction of movement, at least for this name, one certainly shouldn’t rule out such a move.
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What’s been driving this move?
Loblaw’s recent outperformance appears to be a function, at least in part, of increased investor demand for companies perceived to be defensive. As the dominant player in the Canadian retail landscape, Loblaw benefits from quasi-monopoly-like power in this market. As such, the company’s ability to maintain margins in periods of rising prices is something many investors like. Given the inflationary pressures of late, that’s perhaps more true than ever.
Indeed, Loblaw’s 4.1% revenue growth rate over the past year in Q1, and the company’s EPS growth of 9.3%, should drive some stock price appreciation. But such fundamental improvements can’t fully explain the more than 40% move this stock has made over the past year.
I think this move is more a function of the company’s high return on equity (at nearly 25%) and retail gross margin above 30%, which is hard to attain. Loblaw has proven itself to be one of the best operators in this space, and until that changes, there’s going to be demand for this stock.
So, is Loblaw a buy at current levels?
I do think Loblaw is starting to look pricey, at a valuation of around 31 times earnings. And with a dividend yield of just 1%, there’s not much to write home about on the income-generating side of the ledger either.
That said, I do think robust investor demand for companies with very defensive business models should bode well for investors over the medium term. If the macro situation improves, I think Loblaw could see some give-back from here. But for those who are bracing for pain ahead, this is a stock that looks relatively reasonably valued in this current environment.
