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Metro stock ‘a steady story’ in ongoing grocery wars

The Metro store at Lakeshore and Southdown Road store in Mississauga August 9, 2014.

J.P. MOCZULSKI/The Globe and Mail

Shares in grocery and drug giant Metro Inc. are trading near all-time highs despite intense competition across the sector, although future growth could be limited as larger players keep up the fight for loyal customers.

The Montreal-based company behind such retail banners as Metro, Food Basics and Drug Basics across Quebec and Ontario, reported flat profit and a modest 1-per-cent increase in same-store sales in its most recent quarter.

A handful of analysts raised their target prices after third-quarter earnings were released last week, saying the company's success in passing on higher food costs to consumers and a new bakery acquisition should help increase future profits.

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Some remain skeptical of how Metro will fare in the ongoing grocery wars, as competitors such as Wal-Mart Stores Inc., Target Corp. and Loblaw Cos. Ltd. continue to ramp up their offerings and presence in Metro's key markets.

"Metro continues to be impacted by the highly competitive grocery environment," says Accountability Research analyst Kevin Chu, who has a "hold" on the name and a $69 price target. "It's a steady story, but not something we're super-excited about."

He is one of four analysts with a "hold" or equivalent rating; two say "sell" while six see the stock as a "buy," according to S&P Capital IQ.

The consensus price target over the next year is $71.46, which is around where the stock is currently trading. The stock hit a 52-week intraday high of $73.32 on Tuesday (it ended the day at $71.75) and traded at an all-time high just below $76 in July, 2013. Metro shares have doubled over the past five years.

CIBC World Markets analyst Perry Caicco raised his target to $75 from $70 last week, but continues to rate Metro "sector performer," which is similar to "hold."

He says the company "continues to engineer the earnings carefully" but that it needs to improve its position in Ontario. Metro said last week it hired a new senior executive to oversee its Ontario division.

"Improving the core offering in Ontario remains Metro's biggest opportunity, but improvements of that magnitude will require more than just one new senior executive, and possibly some fundamental cultural changes. That will take time," Mr. Caicco said in a note. "The industry may recover in 2015, but Metro may recover a bit slower."

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BMO Nesbitt Burns analyst Peter Sklar has a $62 target on Metro stock and an "underperform" rating, which is similar to "sell." He believes Metro remains vulnerable to factors including the expansion of Wal-Mart superstores in Quebec, Loblaw's synergies after its recent acquisition of Shoppers Drug Mart, and Sobeys Inc.'s purchase of Safeway Inc.'s Canadian division.

Metro chief executive Eric La Flèche told analysts last week the Metro banner is "holding its own" in the highly competitive retail landscape. The company, which operates about 600 food stores and more than 250 drugstores, recently closed its acquisition of a 75-per-cent stake in Première Moisson, which boosts its lineup of baked goods.

Some analysts see Metro as a good bet for investors given its ability to manage costs, alongside a history of steadily increasing its dividend, now yielding about 1.7 per cent.

"[Metro] continues to enjoy above-average profitability driven by in-store execution and customer loyalty," RBC Dominion Securities analyst Irene Nattel said in a note. She has a $77 target on the stock and an "outperform" (similar to "buy").

Desjardins Securities analyst Keith Howlett said in a note that Metro was "one of the best operators within the grocery industry," while upgrading the stock to "buy" from "hold" and raising his target to $76, from $68.50.

"The market remains competitive; however, Metro has a track record of delivering value to shareholders," added National Bank Financial analyst Vishal Shreedhar, who has an "outperform" and $74 target.

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