As Shoppers Drug Mart Corp. falls to its lowest level in more than five years, convincing arguments to buy the stock at these low levels are few and far between. On Thursday, two analyst reports were hardly uplifting.
The first, from Kenric Tyghe at Raymond James, cut the target price to $42 from $45, while maintaining a "market perform" recommendation.
"We remain cautious on Shoppers Drug Mart's growth outlook despite incremental data points, given the noise ahead of the reform proposals coming into effect May 15, 2010 and the current lack of visibility on the magnitude and specifics of the cost cutting initiatives," the analyst said in a note.
The reference here, of course, is to the proposed regulatory changes from the Ontario government, which will reduce earnings derived from generic drugs at Shoppers and its competitors.
The government's announcement in early April whacked Shoppers Drug Mart shares, sending them on a 19 per cent slide. Its disappointing first quarter results, released on Wednesday, only added to the misery.
Michael Van Aelst, an analyst at TD Newcrest, cut his target price on the stock to $39 from $40 and maintained a "hold" recommendation.
"In our opinion first quarter results were a bit on the soft side as the weaker cough, cold and flu season meant that customers had less reason to stop into a drugstore to purchase their habitual cold remedies," the analyst said. "In addition, the H1N1 scare appeared to cause people to stock up the medicine cabinet more than usual in earlier quarters."
His new target is based on slightly lower earnings estimates for 2011 - but those estimates might have to be adjusted again if other provinces follow Ontario and make regulatory changes of their own, a possibility that is clearly baking a lot of uncertainty into the share price.