Investors still have a taste for Loblaw's shares

Ms. Warne said that even though Loblaw's stock is pricey, it has remained steady. The market is paying a premium for the solid and consistent performance of Loblaw, she said.

The Globe and mail
November 27, 2001

Investors still have a taste for Loblaw’s shares
Paying a premium for grocery giant's solid performance
Caroline Alphonso

Shares of Loblaw Cos. Ltd. have maintained a healthy balance during these tough economic times and investors won't likely be losing their taste for the stock anytime soon, analysts say.

Indeed, the Toronto-based supermarket giant's stock has remained consistent this year, ranging between $46.10 and $54.05. It closed yesterday at $51.64, up 24 cents or 0.47 per cent on the Toronto Stock Exchange.

"So far in Canada, the recession has not been pronounced enough to impact food sales," said Denyse Chicoyne, an analyst at BMO Nesbitt Burns Inc. "That's the last thing people cut and we haven't seen it happening yet."

In releasing its fiscal third-quarter results Nov. 14, John Lederer, the company's president, said profit jumped 22 per cent from a year earlier despite a weakening economy.

The company, controlled by George Weston Ltd., said profit for the period ended Oct. 6 climbed to $138-million or 50 cents a share from $113-million or 41 cents in the same period last year. Revenue rose 7 per cent to $6.7-billion from $6.3-billion a year ago.

For the nine months, Loblaw earned $346-million or $1.25 a share, compared with $285-million or $1.03 a year ago. Revenue rose to $16.2-billion from $15.2-billion.

Ms. Chicoyne said that even if consumers cut back on costs, Loblaw still stands to gain because its private labels, such as No Name and President's Choice, are well known.

Also, Loblaw said yesterday that it is set to expand its non-food products and will hire Joseph Mimran of Club Monaco to develop a line of goods.

Ms. Chicoyne has a 12-month target price of $70 a share.

She said that although the stock is expensive on the basis of its price-to-earnings multiple, Loblaw is a strong company in its sector.

Peter Rozenberg of UBS Warburg agrees, adding that Loblaw is on track to do well, given its strong sales, new store openings and continued focus on operating and administrative cost control and reductions.

The analyst has a "buy" recommendation on the stock with a 12-month target price of $58 a share. He expects price competition to increase in the next couple of years, especially in Quebec.

In 1998, Loblaw purchased Provigo Inc., Quebec's largest grocery chain. Adding to the industry consolidation was the takeover of Oshawa Group Ltd., which flies the IGA and other banners, by Empire Co. Ltd. of Stellarton, N.S., owner of Sobeys. The other major player in Quebec is Metro Inc.

Mr. Rozenberg estimates that Loblaw is spending about 30 per cent of its $1.1-billion capital budget this year in Quebec, where it currently generates only 24 per cent of total sales.

"We believe the company is moving in the right direction in Quebec as we believe it is replacing older and smaller store formats with larger and more modern ones," Mr. Rozenberg said.

While some analysts believe there will be price competition between Loblaw, Sobeys and Metro in the Quebec market, Ms. Chicoyne said there is no reason for that to occur.

She said the companies need to maintain earnings, and will likely try different ways of increasing sales and their market share.

Kate Warne, Canadian market strategist for Edward Jones, said the companies will likely focus on promoting the hottest products in order to capture market share.

She attributes Loblaw's good earnings to the fact that it's able to find ways to offer products more cheaply and reduce overall costs.

And by being bigger, it has a better distribution network, she added.

Ms. Warne believes there will likely be more consolidations taking place in the sector because the smaller players are getting more and more squeezed out.

"The new entrants tend to drive out the smaller … players. Loblaw is able to hold its own and in some cases pick up market share," she said. "It's the smaller and higher-priced grocery stores that lose."

Ms. Warne said that even though Loblaw's stock is pricey, it has remained steady. The market is paying a premium for the solid and consistent performance of Loblaw, she said.

"Grocery stores tend to be pretty recession-resilient. People buy groceries whatever is happening to the economy."

Loblaw Cos.: vital statistics
Business description
A retail and wholesale food distributor with operations across Canada.
Head office: Toronto, Ont.
Telephone: 416-922-8500
Web site: http://www.loblaw.com
TSE symbol: L
Employees: 114,000
Share values

Trailing 12-month earnings per share $1.56
52-week intraday high $55.00
52-week intraday low $45.50
Last close $51.64
Change from previous $0.24
1-year total return -4.72%
60-month average annual return 31.76%

Funds with heaviest weighting in Loblaw Cos.
Share holding as a % of total fund value, as of Sept. 28.
AIC Advantage II 13.4
AIC Advantage 12.6
AIC Diversified Canada 9
Foresters Equity 7.21
London Life Equity (MF) 4.12
Mackenzie Ivy Canada 3.66
Atlamira Equity 3.6
AIM Canadian Premier Class 3.09
AIM Canadian Premier 2.98


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