Loblaw Companies Ltd (L.TO)

Their 200-day moving average has been flat for a year and is starting to decline. It faces many headwinds: costs, heavy competition (from Walmart, Costco, Amazon); reform in testing of generic drugs; and higher wages in some provinces.

Has good free cash flow yield of 8-9%. The premiere grocery store in Canada. Its trading valuation has come down. Deflation on the grocery side is stabilizing. They spent a lot of money on the technology behind supply chain management, which caused lots of problems, but is now saving them money. Shoppers Drug Mart acqusition is doing incredibly well. Bottom line is growing around 8-10%. Don't expect capital appreciation of past years because competitors have caught up to them. Dividend yield of 1.7%

He thinks the reward system update has not gone well and can cause fissures in customer loyalty. Presuming they can recover there is not much competition and things should go back to normal. It is a well-run company, hey says, and they would be a company to keep as an anchor.

The grocery business is tough, with very low margins. Minimum wage, tougher pricing on drugs and the bread scandal are headwinds. He likes their strong discount presence, their urban focus and their stock buybacks. He thinks they are much better positioned than Metro or Empire. Lots of people don’t like this stock now, which is another reason that he likes it. With all the free cash flow buying that much stock, they are paying you to wait.

He would avoid it. Good company but better places to allocate your money in the next couple of years. Generic drug reform is going to affect them as well as the increase in minimum wages. Food price deflation is affecting them as well as the threat of e-commerce.

(A Top Pick April 26, 2017. Down 12.78%). The increase in minimum wage is a $140 million headwind in 2018 and there is a lot of competition. He sold the stock early in the year. There are continuing struggles in the food industry group.

A stock he likes a lot. It's a great story. Have done a really great job of integrating Shoppers. They are buying back about $1 billion in stock right now. They've done a really good job with their "no frills" and discount banners, which is going to be a segment of the market that is going to be increasingly important going forward.

Bread price-fixing He can’t believe this happened in Canada with a major supermarket. Loblaw will be offering $25 gift cards to consumers and book a hit of $75M-$150M which isn’t a big amount considering the size of the company. He doesn’t think it will have any dramatic impact.

If he were going to buy a grocer, it would be Kroger (KR-N). It’s much cheaper, the largest chain in the US, a big discount, and probably growing just as fast. Amazon (AMZN-Q) is hurting both of them.

(A Top Pick Nov 23/16. 0%.) A lot of concerns that surround this company are reflected in the valuation. They are in line with where it has been historically. Has a lot of operational room to offset some of the headwinds.

WN-T vs. L-T Long Term. Neither is growing dramatically. They are quite interrelated. They are so similar that if there is a capital gain, then don’t move from one to the other. He would rather have L-T because they have more disclosure. He is not that comfortable being in the grocery space anyway.

The grocery business is not a high profit margin business. There is a lot of competition. Grocers are going to have to spend a lot of money improving and getting delivery to the home, because that is where Amazon is heading. Costco is taking a lot of business, and there are more coming to Canada. There is also Walmart which people love. This is a great defensive name if there is a recession coming, but we are in a pretty good economy, and would not be his best idea at the moment.

Q2 earnings were up 10%. Trading below its five-year average by about 2 multiple points. Food inflation is up for the 2nd month in a row after a year of deflation. Minimum wage escalation is bad for them. Have to do a lot of heavy lifting here for their EPS to grow at 7%, and to keep their margins up at around 8.5%. He would not be a buyer.

They have probably exhausted the benefit of the Shoppers acquisition although there is a little they can do with groceries on the pharmacy side. There is intense competition in grocery not counting AMZN-Q. It is not the same in Canada because of geographic dispersal. He does not think growth is appealing in this sector and so is not into it.

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.