Loblaw’s reported very positive earnings this morning, helping solidify our thesis in the company. Below is our analysis on the company, which also translates to other companies that we own in the grocery industry.
Our key thesis on Loblaw’s can be summarized as follows:
- The company is trading at two decade low valuations and is one of the better bargains in the today’s market (see chart 1 and 2).
- The extremely low valuation is attributed to multiple years of negative news regarding operations and the industry; thus, like any value stock with low expectations, it does not take much to lift the price of the stock (see chart 3).
- A good example of a comparable company is Safeway, which we have been building a stake in lately for our World Fund. Another turnaround story which seems to have put in a multi year bottom and has begun to see some gains (see chart 4).
Some possible catalyst’s down the road:
- The rally in the TSX has largely ignored non-cyclical sectors as attention is focused on commodities and financials.
- Many cyclical sectors have become overbought and fairly valued, thus bargains in non-cyclical sectors are becoming more attractive.
- Any turn in some of the cyclical sectors will push people into attractively priced companies with low valuations, stable and visible earnings (we believe the market is undervaluing that characteristic).
- Relative performance has shown signs of improving. An example would be the fall/winter period where Loblaw’s returned 20% while the TSX fell almost 20% (see chart 5).
Longer term:
- Consumer thriftiness should continue, which bodes well for discount retailers/grocers.
- Demographic trends and willingness to eat at home rather than eat out also could become a catalyst down the road.
Summary
While there is a lot of negative news priced into the stock and industry, Loblaw’s remains an excellent value opportunity with great upside on a relative and absolute basis.
Chart 1: Price to Earnings Ratio Valuation
Chart 2: Price to Book Ratio Valuation
Chart 3: Loblaw Price History
Chart 4: Safeway Price History
Chart 5: Loblaw versus TSX Index (5 years)
