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George Weston delivery trucks (Louie Palu/The Globe and Mail)
George Weston delivery trucks (Louie Palu/The Globe and Mail)

George Weston upgraded Add to ...

George Weston Ltd. or Loblaw Cos. Ltd.? For many investors, there is some confusion over which is the better stock - or whether they are really that different - given that George Weston owns a 62 per cent stake in the food retailer.

However, George Weston has actually outperformed Loblaw in recent years, largely because Loblaw has been going through a tough reorganization phase and has had to face tougher competition. Jim Durran, an analyst at National Bank Financial, shifted his preference to George Weston.

The switch came after George Weston reported upbeat quarterly financial results on Tuesday, with adjusted earnings rising about 37 per cent in the third quarter, to $1.43 a share. Analysts had been expecting adjusted earnings of $1.21 a share.

Mr. Durran noted that the better-than-expected earnings were largely the result of better performance by Weston Foods, George Weston's non-Loblaw holding, which is why he's taken a new liking to George Weston.

He raised his recommendation on the stock to "outperform" from "sector perform." He also raised his 12-month target price, to $88 from $87.

"While we continue to like Loblaw over the long term, our preference has now shifted to owning George Weston in the near term, which offers investors the upside from the Loblaw's turnaround, along with bakery earnings stability and cash deployment upside," he said in a note. That last point refers to the company's desire to make strong bakery-related acquisitions.

Although the cost of wheat is on the rise, leading to potentially higher input costs for the bakery operations in fiscal 2011, Mr. Durran argues that the company is looking ahead to raise prices next year to offset this pressure.

Despite the underlying strength of the stock, the analyst believes it has been overly beaten up since August, falling more than 7 per cent as of Tuesday. This pullback, coupled with better-than-expected earnings at Weston Foods, means that George Weston is now too good to pass up.

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