On today’s TSX breakouts report, there are 98 stocks on the positive breakouts list (stocks with positive price momentum), and 18 stocks are on the negative breakouts list (stocks with negative price momentum), of which 15 securities are from the energy sector.
Featured today is an oversold consumer stock that is on the negative breakouts list – Metro Inc. (MRU-T). The share price has plunged 11 per cent since closing at a record closing high on Dec. 9, putting the stock in oversold territory. However, the stock price may soon find downside support and stabilize.
A brief outline on Metro is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Montreal-based Metro operates 975 food stores under multiple banners, including Metro, Metro Plus, Super C, Food Basics, Adonis, Première Moisson, Marché Richelieu, and Marché Ami. In addition, the company has 645 drugstores under the bannersJean Coutu, Metro Pharmacy, Food Basics Pharmacy, and Brunet.
In terms of the company’s geographical breakdown, according to the company’s fiscal 2022 annual report, 72 per cent of its food stores were located in Quebec (698 stores) with the balance located in Ontario (277 stores). Its drugstores are located in three provinces, 82.5 per cent of its total drugstores were located in Quebec (532 stores), 13 per cent in Ontario (85 stores), and 4 per cent were located in New Brunswick (28 stores).
Investment thesis
- Combination of traditional and discount stores. Of the 975 food stores, 241, or roughly 25 per cent, are discount banners - Food Basics (142 stores) and Super C (99 stores).
- Diversified operations with both grocery stores and pharmacies.
- Modest earnings growth anticipated.
- Realizing market share gains.
- Reliable and rising dividend.
- In terms of its valuation, its multiples are near its historical averages after the recent pullback in the share price.
- Key potential risks to consider include: 1) rising costs/inflation pressures; 2) competitive pressures (promotional activity); 3) higher wages (On May 1, 2023, minimum wage will increase 7 per cent in Québec. Labour is the company’s largest expense).
Quarterly earnings
Before the market opened on Jan. 24, the company reported its first-quarter fiscal 2023 financial results (the company’s fiscal year-end is in late September, on the last Saturday of the month).
Food same-store sales increased 7.5 per cent year-over-year. Pharmacy same-store sales increased 7.7 per cent year-over-year. The company’s gross margin was 19.6 per cent, down from 19.9 per cent reported last year. Earnings before interest, taxes, depreciation and amortization (EBITDA) stood at $462-million, up 8.9 per cent year-over-year, surpassing the Street’s forecast of $454-million. Adjusted earnings per share came in at $1.00, topping the consensus estimate of 97 cents, and up from 85 cents reported during the same period last year.
That day, the share price increased 1.6 per cent.
On the earnings call, president and chief executive officer Eric La Flèche remarked on shifting consumer behaviour, “Discount continues to outpace conventional. It’s been the case for several quarters. It continued into Q1 [first quarter]. So both Quebec and Ontario, our discount banners are growing very nicely, similar growth, I would say…We’re pleased with our performance, overall performance, and we’re pleased with our relative performance versus competitors, either in discount or in conventional…Consumer behavior is more of the same in this high inflationary period. Our features and specials are selling more and more every month so people are looking for value and stretching their dollars.”
Consumers will have to continue to search for value as food inflation is anticipated to persist.
Mr. La Flèche added, “We’re getting a significant number of cost increase demand. So we have good conversations with our vendors to manage it, to mitigate and to control the rate of increases because we want to protect its customers and protect the pricing at retail. But there are increases coming. The root causes of worldwide food inflation are still there, and we’re going to have to accept some of these increases. Hopefully, we will manage to mitigate as best we can.”
Returning capital to its shareholders
Management is firmly committed to returning capital to its shareholders.
In Jan. 24, the company announced a 10-per-cent dividend hike, marking its 29th consecutive year of dividend growth. The board approved lifting its quarterly dividend to 30.25 cents per share from 27.5 cent per share.
The company’s dividend policy is to pay between 30 per cent and 40 per cent of its adjusted net earnings from the prior year (before extraordinary items).
Management has also been actively repurchasing shares as part of its share buyback program. Between Nov. 25, 2022 and Jan. 13, 2023, the company repurchased 696,000 shares at an average price per share of $74.94 under its current normal course issuer bid program that allows the company to repurchase up to 7-million shares between Nov. 25, 2022 and Nov. 24, 2023.
Analysts’ recommendations
According to Bloomberg, this consumer staples is covered by 11 analysts. One (Veritas’ Kathleen Wong) has a “buy” recommendation, nine have neutral recommendations and one (Morningstar’s Dan Wasiolek) has a “sell” recommendation.
It is important to note that many analysts have maintained neutral-equivalent recommendations on the stock for years.
CIBC’s Mark Petrie has had a “neutral” call on the stock since 2016. National Bank Financial’s Vishal Shreedhar has maintained a “sector perform” call since 2015. RBC’s Irene Nattel has maintained a “sector perform” recommendation since 2017. TD’s Mike Van Aelst has had a “hold” recommendation since 2017.
The firms providing research coverage on the company are: ARC Independent Research, ATB Capital Markets, BMO Nesbitt Burns, CIBC World Markets, Desjardins Securities, Morningstar, National Bank Financial, RBC Dominion Securities, Scotiabank, TD Securities, and Veritas Investment Research.
Revised recommendations
Last month, six analysts revised their expectations.
- BMO’s Peter Sklar downgraded the stock to a “market perform” and reduced his target price by $4 to $78.
- CIBC’s Mark Petrie lifted his target price to $76 from $72.
- Morningstar’s Dan Wasiolek tweaked his target price to $66 (the low on the Street) from $65.
- National Bank Financial’s Vishal Shreedhar adjusted his target price to $80 from $79.
- RBC’s Irene Nattel increased her target price by $4 to $80.
- TD’s Mike Van Aelst revised his target price to $77 from $76.
Financial forecasts
According to Bloomberg, the consensus EBITDA estimates are $1.984-billion in fiscal 2023 and $2.054-billion in fiscal 2024. The consensus earnings per share estimates are $4.26 in fiscal 2023, up 12 per cent from $3.82 reported in fiscal 2022, rising to $4.49 in fiscal 2024.
Earnings expectations have been rising. Four months ago, the consensus earnings per share estimates were $4.12 for fiscal 2023 and $4.39 for fiscal 2024.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 15.5 times the fiscal 2024 consensus estimate, slightly below its five-year historical average multiple of 16 times. On an enterprise value-to-EBITDA basis, the stock is trading at 10 times the fiscal 2024 consensus estimate, below its five-year historical average of 10.6 times.
Over the years, Metro has traded at a higher valuation relative to its industry peers. Currently, shares of Loblaw Companies Ltd. (L-T) and Empire Company Ltd. (EMP-A-T) are trading at forward price-to-earnings multiples of 14.1 times and 11.8 times, respectively, and at forward EV/EBITDA multiples of 8.1 times and 6.9 times, respectively.
Metro’s average 12-month target price is $77, implying the share price is has nearly 11 per cent upside potential. Individual target prices are: $66, $74, $76, two at $77, $78, $79, and four at $80.
Insider transaction activity
Recent trades in the public market reported by insiders include:
On Nov. 28, Marc Giroux, chief operating officer - food, exercised his options, receivied 4,500 shares at a cost per share of $40.23, and sold 4,500 shares at a price per share of $78.0035, after which this particular account held 16,356 shares. Net proceeds totaled just under $170,000, not including any associated transaction fees.
On Nov. 25, Serge Boulanger, senior vice-president – national procurement and corporate brands, exercised his options, receiving 7,440 shares at a cost per share of $40.23, and sold 7,440 shares at a price per share of $77.0574, leaving 25,800 shares in this specific account. Net proceeds totaled nearly $274,000, excluding any associated transaction charges.
Chart watch
On Dec. 9, 2022, the share price closed at a record high of $78.38. However, since then the stock price has tumbled 11 per cent, putting the stock in oversold territory. The relative strength index (RSI) is 24. Generally, an RSI reading at or below 30 reflects an oversold condition.
In terms of key technical resistance and support levels, the share price has major overhead resistance between $78 and $80, near its record closing high. Looking at the downside, the share price may soon find support around the $67 or $68 price levels.
ESG Risk Rating
According to risk provider Sustainalytics, Metro has an environmental, social and governance (ESG) risk score of 21.0 as of Jan. 31, 2023. A risk score of between 20 and 30 reflects a “medium risk” rating.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
This report should not be considered an investment recommendation.
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Jennifer Dowty