Loblaw Companies Ltd (L.TO)

There is an impact for a stronger Cdn$ being able to purchase from the US, however, most grocers have currency hedging arrangements to offset currency fluctuations. The amount of purchases from US are much lower than you would imagine. It could be as low as 10% or lower. The stock is trading at about 10X Enterprise Value over EBITDA, which is in line with historical norms. Pays a 1.5% dividend yield. There are mounting costs as well as mounting competition. Food deflation hasn’t really helped. Minimum wage hikes are estimated to be about $90 million in additional costs per year. Healthcare reform is lowering drug generic drug prices, therefore pushing down margins. Too many headwinds face this company.

With wage inflation, this one is going to be tough. To make 7% EPS compounded annual growth over the next couple of years, they are going to need to be very aggressive with their cost reductions. He would stay away for a little while.

Loblaw (L-T), Empire (EMP.A-T) or Metro (MRU-T)? This has proven to be the best run grocer in Canada.

The dominant one in grocery chains in Canada. The grocery industry lately has seen food deflation. Some are facing higher labour costs if minimum wage initiatives go forward, which will be fairly significant to a company like this. He prefers to own this through George Weston (WN-T), which gives you the bakery business as an added diversification. In groceries, this company would be his 1^st choice.

(Top Pick Apr 15/16, Down 2.26%) If anyone can get through AMZN-Q, L-T can. They have very deep pockets. Their balance sheet looks good. They are moving silently into health through Shoppers. Sometimes there are health clubs within their stores. This may make them okay.

He does not have a lot of exposure to the consumer staples space. Prices should start dropping at Whole Foods next week after AMZN-Q acquired them. The PE is 15 times forward earnings. It is not cheap. There is increased competition from WMT-N and COST-Q. AMZN-Q is now also in the picture. Minimum wage hikes in Ontario will be a challenge also.

It has come off again. It was getting overvalued. It has its challenges: AMZN-Q and WMT-N as well as drug pricing for Shoppers with Quebec moving that way. Overall it is a good company and the two loyalty programs coming together should be positive. It should do well.

He is always neutral on this. A good place to be after the stock has corrected, and thinks it can correct some more. He can’t see any reason why this would take off. It’s a tough business, but they are well-established.

The largest grocery chain in Canada and also owns Shoppers Drug Stores, which is working out incredibly well for them. They’ve put a lot of capital expenditure into the IT business, meaning you can order a lot of stuff online. There has been a lot of deflation on the grocery side, and the IT business will help offset that. Dividend yield of 1.5%. (Analysts’ price target is $80.)

There are wonderful opportunities in the food business. But this one is in a very competitive environment and he does not own it right now. It does not have a huge competitive advantage. He is in a wait and see mode with respect to Shoppers.

Trading at about 15X earnings. They have rationalized Shoppers quite well. Also, have spent a lot of money on technology. They throw off about $1 billion of free cash flow each year, and a lot of it has been spent on technology and improving stores. There has been a lot of food deflation, and they’ve been able to offset that with better technology. Dividend yield of 1.5%. (Analysts’ price target is $83.50.)

(A Top Pick July 12/16. Up 1.86%.) The stock had gone up to about $7-$8 and then Amazon (AMZN-Q) acquired Whole Foods which impacted all the retailers in the US as well as our Canadian grocers. This is a really attractive entry point. Loblaw’s has a pilot project called “Click and Collect” where you can order online. She also likes Shoppers because of the demographics.

The Amazon (AMZN-Q) acquisition of Whole Foods (WFM-Q) brings into question the whole food retailing business in North America. More so immediately in the US, but also in Canada. His desire to be in this business has gone down to zero.

Before today, this is a name that typically traded between 18X and 15X, and currently is around 17X. You want to buy it more towards the lower end of the range at about 15X. With the news on Amazon’s acquisition, you are probably going to be able to get it at around 15X. Q1 was a real nice beat. Their growth margins were up very sharply and EPS rose 9% year-over-year. They hiked their dividends and they have a stock repurchase going on.

He is staying away from some of the defensive names like this one. Shares are trading at 17X forward earnings with an 8% growth rate. A modest 1.4% dividend yield. Valuations are slightly above to average based on historical norms. What concerns him is that food deflation is happening right now and we are seeing a highly competitive industry. Same-store sales have been flat to falling for this company, although on the Shoppers side they have been inching higher.