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On today’s Breakouts report, there are 19 stocks on the positive breakouts list (stocks with positive price momentum), and 44 stocks are on the negative breakouts list (stocks with negative price momentum).

Featured today is an oversold stock that is on the cusp of appearing on the negative breakouts list – Metro Inc. (MRU-T). The share price has dropped 5.5 per cent over the past five trading sessions, putting the stock in oversold territory. However, the stock is nearing strong technical support.

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 over 900 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 over 600 drugstores under the banners: Jean Coutu, Metro Pharmacy, Food Basics Pharmacy, and Brunet.

In terms of the company’s geographical breakdown, according to the company’s fiscal 2020 annual report, 71 per cent of its food stores were located in Quebec and 29 per cent in Ontario. Its drugstores are located in three provinces - 83 per cent in Quebec, 13 per cent in Ontario and 4 per cent in New Brunswick.

Investment thesis

  • Steady growth. Management targets annual earnings per share growth of between 8 per cent and 10 per cent.
  • Reliable and rising dividend. 27 consecutive years of dividend growth.
  • Healthy balance sheet.
  • Valuation nearing its historical averages as the share price has declined.
  • Key potential risks to consider include: 1) market selloff; 2) inflation; and 3) competitive pressures.

Quarterly earnings

Before the market opened on Aug. 11, the company reported its third-quarter fiscal 2021 financial results (the company’s fiscal year-end is in late-Sept.).

Food same-store sales declined 3.6 per cent year-over-year but increased 9.4 per cent compared to the third-quarter fiscal 2019 (pre-pandemic). Pharmacy same-store sales increased 7.6 per cent year-over-year, and increased 8.6 per cent compared to fiscal 2019. The company’s gross margin was 19.8 per cent, down from 20 per cent reported last year.

Earnings before interest, taxes, depreciation and amortization (EBITDA) stood at $533.6-million, down 1.7 per cent year-over-year, falling short of the Street’s forecast of $555-million. Adjusted earnings per share came in at $1.06, below the consensus estimate of $1.13, and down from $1.08 reported during the same period last year but up 18 per cent from the third-quarter of fiscal 2019. That day, the share price declined 2 per cent.

On the earnings call, president and chief executive officer Eric La Flèche commented on its food stores, “Our internal food basket inflation was 1 per cent, half of what we experienced in Q2 [the second quarter]. With the rollout of the vaccine and the gradual lifting of restrictions, we saw traffic improve year-over-year for the first time since the beginning of the pandemic. Basket size, however, was down as customers increase their store visits. Promotional penetration continues to increase quarter-over-quarter and we are getting close to pre-pandemic levels.”

Management provided a cautious outlook in its earnings release, “While the COVID-19 related restrictions have been significantly eased over the last few months, it is still uncertain whether we are gradually transitioning to a pre-pandemic environment, or whether we will face further restrictive measures due to a fourth wave of infections. It is also difficult to predict the impact the pandemic will have on the long-term shopping patterns of our customers. With the COVID-19 related restrictions ramping down, we expect our food sales in the short term to continue to decline versus last year’s exceptionally high levels, but to compare favourably to pre-pandemic levels. On the pharmacy side, the easing of restrictions should have a positive impact on certain commercial categories that were negatively affected by the pandemic, such as beauty, cosmetics and cold and flu products.”

Returning capital to its shareholders

Management is firmly committed to returning capital to its shareholders.

In Jan., the company announced an 11 per cent dividend hike, marking its 27th consecutive year of dividend growth. The board approved an 11 per cent dividend increase, lifting its quarterly dividend to 25 cents per share from 22.5 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. As at July 30, the company had repurchased 5,875,000 shares at an average price per share of $56.78 under its current normal course issuer bid program that allows the company to repurchase up to 7-million shares between Nov. 25, 2020 and Nov. 24, 2021.

Analysts’ recommendations

This consumer staples is covered by 12 analysts. Three have buy recommendations, eight have neutral recommendations, and one analyst (Karen Short at Barclays) has an “underweight” recommendation.

The firms providing research coverage on the company are: ARC Independent Research, ATB Capital Markets, Barclays, BMO Nesbitt Burns, CIBC World Markets, Desjardins Securities, Morningstar, National Bank Financial, RBC Dominion Securities, Scotia Capital, TD Securities, and Veritas Investment Research.

Revised recommendations

Last month, seven analysts revised their expectations.

  • ARC’s Jim Marrone to $65 from $58.
  • Desjardins Securities’ Chris Li to $66 from $59.
  • Morningstar’s Nicholas Johnson to $59 from $57.
  • National Bank Financial’s Vishal Shreedhar to $65 from $66.
  • RBC’s Irene Nattel to $68 from $66.
  • Scotia’s Patricia Baker to $70 from $68.
  • TD’s Mike Van Aelst to $66 from $61.

Financial forecasts

According to Bloomberg, the consensus EBITDA estimate is $1.73-billion in fiscal 2021, $1.8-billion in fiscal 2022, and $1.87-billion in fiscal 2023. The consensus earnings per share estimate is $3.46 in fiscal 2021, up from $3.27 reported in fiscal 2020, rising to $3.68 in fiscal 2022, and $4.02 in fiscal 2023.

Earnings expectations have been coming down. For instance, three months ago, the consensus earnings per share estimates were $3.53 for fiscal 2021 and $3.72 for fiscal 2022.

Valuation

According to Bloomberg, the stock is trading at a price-to-earnings multiple of 16.3 times the fiscal 2022 consensus estimate, slightly above its five-year historical average multiple of 15.5 times but below its peak multiple of approximately 18.5 times during this time period. On an enterprise value-to-EBITDA basis, the stock is trading at 10.5 times the fiscal 2022 consensus estimate, in-line with its five-year historical average.

Shares of peers Loblaw Companies Ltd. (L-T) and Empire Company Ltd. (EMP.A-T) are trading at forward price-to-earnings multiples of 15.2 times and 12.6 times, respectively, and at forward EV/EBITDA multiples of 7.8 times and 7.2 times, respectively.

The average 12-month target price is $64.83, implying the share price is has 8 per cent upside potential. Individual target prices are: $54, $59, $61 $64, two at $65, two at $66, $68, and three at $70.

Insider transaction activity

The most recent trades in the public market reported by insiders are listed below.

On Sept. 2, Christian Bourbonnière, president of Adonis Group, exercised his options, receiving 23,500 shares at a cost per share of $35.42, and sold 23,500 shares at an average price per share of approximately $64.38, after which this particular account held 40,097 shares. Net proceeds exceeded $680,000, not including any associated transaction fees.

On Aug. 31, Carmine Fortino, executive vice-president - Ontario division head and national supply chain, exercised his options, receiving 23,500 shares at a cost per share of $35.42, and sold 23,500 shares at a price per share of $64.7662, leaving 22,913 shares in this specific account. Net proceeds totaled over $689,000, excluding any associated transaction charges.

Between Aug. 13 and 18, Martin Allaire, vice-president – real estate and engineering, exercised his options, receiving a total of 10,960 shares at an average cost per share of roughly $39.23, and sold 10,960 shares at an average price per share of approximately $63.58 with 34,389 shares remaining in this specific account. Net proceeds totaled over $266,000, excluding any associated transaction charges.

Chart watch

Year-to-date, the stock has underperformed its peers.

As of the close on Sept. 17, Metro’s share price was up just under 6 per cent in 2021, below the S&P/TSX consumer staples sector index price return of 12 per cent, and falling short of the price returns of Loblaw and Empire, whose share prices are up 36 per cent and 11 per cent, respectively, year-to-date.

Last week, consumer staples stocks retreated sharply. The share prices of Metro and Loblaw both dropped approximately 5.5 per cent, while Empire’s share price declined 2 per cent.

Given the sharp sell-off in Metro’s share price, the stock is now in oversold territory. The relative strength index (RSI) is 28. Generally, an RSI reading at or below 30 reflects an oversold condition.

In terms of key resistance and support levels, the share price has major overhead resistance around $65. Looking at the downside, the share price is nearing major support around $58, close to its 200-day moving average (at $58.73).

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Please note that this report is not an investment recommendation. 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.

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