Exterior view of a Jean Coutu store on Nun's Island in Montreal, August 21, 2013.Christinne Muschi/The Globe and Mail
The shopping experience at a good pharmacy combines health, beauty and convenience, and it is hard to beat. But, without the promise of consolidation, investors are bored.
Just look at Jean Coutu Group (PJC) Inc., which has killed any hope of a suitor looking its way but has failed to kindle any excitement over its plans for generating its own organic growth.
Two years ago, the shares had surged above $28 amid tremendous enthusiasm for Canadian pharmacies, capping a 95-per-cent rally that began in 2013.
Today, the shares languish 30-per-cent below this peak as the volume of shares traded has slumped 14 per cent. It is difficult to see what could stir the stock price from its deep slumber.
Pharmacies looked like glamour stocks five years ago, after a wave of consolidation raised hopes of big payoffs for investors.
McKesson Corp. established the trend when it snapped up Canadian I.D.A. and Guardian stores for $920-million in 2012 and reinforced the trend with a $3-billion deal for Rexall Drug Stores Ltd. last year.
But Loblaw Cos. Ltd. made the biggest impact when it agreed in 2013 to pay $12.4-billion for Shoppers Drug Mart Corp., enriching investors overnight with a 29-per-cent premium.
Executives were willing to pay handsomely because they saw clear benefits to being bigger. They believed that a larger chain of pharmacies could compete effectively against massive U.S. players that had moved into Canada, such as Wal-Mart Stores Inc., Costco Wholesale Corp. and, at the time, Target Corp., which were offering pharmaceutical services of their own.
As well, Canadian provinces had imposed regulatory changes on pharmacies, prohibiting them from receiving rebates from generic drug manufacturers. In response, pharmacies created their own private-label brands, but to be efficient in this generic endeavour, they needed to be big – and partners provided heft.
Montreal-based Metro Inc. looked like an ideal suitor to Jean Coutu, given that the grocer's Quebec supermarkets were a natural fit with Jean Coutu's Quebec pharmacies.
Yet, Jean Coutu had no interest in this merger mania – and investors had little say in the matter, given that the founding Coutu family controlled the company through multiple voting shares.
Instead, Jean Coutu took a different route: It withdrew entirely from the United States in 2013, selling its remaining shares in Rite Aid Corp. and focused on expanding into Ontario and building market share within Quebec.
The problem: Next to the overnight wonders that a takeover deal can generate, this organic growth hasn't been impressing anyone.
Quarterly results explain why. On Friday, Jean Coutu reported total third quarter revenue of $763.7-million, up less than 4 per cent over the past two years.
Over the same two-year period, the total number of franchised stores – operating in Quebec, Ontario and New Brunswick under the banners PJC Jean Coutu, PJC Clinique, PJC Jean Coutu Santé and PJC Jean Coutu Santé Beauté – rose by just two stores, to 418.
Quarterly profit fell to $51.2-million, down nearly 9 per cent – and expressed on a per-share basis, profit fell to 28 cents a share, down from 30 cents a share two years ago.
In other words, Jean Coutu looks like a mature business that is struggling to find growth opportunities. It has been working on boosting its level of efficiency – it has a new centralized distribution centre and headquarters, in Varennes, Que. – but so far, the changes have only brought higher labour costs and other expenses.
Analysts appear far from committed to the stock. Just one of them sees it as a buying opportunity, while six analysts have "hold" recommendations and four have "sell" recommendations.
You could bide your time, too. If you sat on the stock, you would collect a dividend that rises modestly each year and currently yields 2.4 per cent – and, yes, one day the shares could rally again.
But, without a takeover, you might be waiting a long time.
David Berman