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On today’s Breakouts report, there are 63 stocks on the positive breakouts list (stocks with positive price momentum), and only three stocks are on the negative breakouts list (stocks with negative price momentum).

The company highlighted today has remained on the negative breakouts list for quite some time with its share price continuing to drift lower - Loblaw Companies Ltd. (L-T).

This is a great company, an industry leader, but not a great stock – at least in the near-term.

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The average one-year target price suggests there is nearly 25-per-cent upside potential, however investors may have to be patient as a recovery in the share price may be a few quarters away. That being said, the share price may soon bottom and stabilize, and for long-term investors, the risk/reward profile looks attractive.

A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Loblaw has two main operating divisions. The retail segment, representing most of the company’s total revenue, consists of supermarkets and drug stores under banners such as Loblaws, Real Canadian Superstore, Valu-Mart, Fortinos, Zehrs, No Frills, Pharmaprix, and Shoppers Drug Mart. The financial services segment provides credit card and banking services.

Investment thesis highlights

Near-term challenges:

  • Negative investor sentiment. Lack of buyers with a rotation out of defensive plays and into cyclical plays.
  • Competitive pressures, particularly at discount supermarkets nationwide. Elevated promotional activity reduces profitability.
  • COVID-19 costs pressures profitability and earnings growth. Last quarter, roughly $85-million in COVID-19 related costs were incurred. Hopefully, these expenses will come down in the second half of 2021.
  • High exposure to discount stores. With COVID-19, there has been a shift in consumer behaviour away from discount stores to conventional stores. Discount stores represent approximately 60 per cent of the company’s supermarket sales.
  • Lack of near-term earnings visibility. In April, management withdrew its 2020 outlook.

Medium and longer-term positives:

  • Industry leader with rising market share.
  • Reliable dividend income and dividend growth.
  • Strong balance sheet. $1.8-billion of cash and short-term investments at quarter-end.
  • Reasonable valuation. Upside potential outweighs downside risk.
  • Eventual elimination of most COVID-19 related costs with the coronavirus vaccine rollout.
  • Return of shoppers to discount stores.
  • Resumption of attractive earnings growth.
  • Benefits from investments including e-commerce (grocery pickup or delivery) and virtual care.

Quarterly earnings results

Before the market opened on Nov. 12, the company reported its third-quarter financial results.

Consolidated revenue increased 6.9 per cent. Food retail same-store sales increased 6.9 per cent. Drug retail same-store sales climbed 6.1 per cent (pharmacy sales rose 10.3 per cent and front store sales grew 2.4 per cent). The company reported adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $1.524-billion, up 2.1 per cent year-over-year. Adjusted earnings per share came in at $1.30, up 4 per cent year-over-year, and surpassing the consensus earnings per share estimate of $1.26.

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The share price rallied 1.4 per cent that trading day.

On the earnings call, Chief Financial Officer Darren Myers provided insights into the start of the fourth-quarter, saying: “In the four weeks following the end of the third quarter volatility continued. Food retail sales and COVID-related costs have continued on a similar trajectory to Q3 [third-quarter] while drug retail sales have seen a deceleration of growth primarily due to the impact of the timing of the prescription volumes related to the change in fill rates.”

The company will be releasing its fourth-quarter financial results before the market opens on Feb. 25, 2021 and hosting an earnings call at 10 a.m. ET. The Street is expecting the company to report earnings per share of $1.26.

Returning capital to shareholders

Management is committed to returning capital to its shareholders.

In November, management announced a 6.3-per-cent dividend increase, its ninth consecutive annual increase, taking its quarterly dividend up to 33.5 cents per share, or $1.34 per share yearly. This equates to a current annualized yield of 2.1 per cent.

During the third quarter, the company repurchased 5-million shares as part of its share buyback program.

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Analysts’ recommendations

Analysts’ recommendations are mixed. After the company released its third-quarter financial results, eleven analysts issued research reports. Four issued buy recommendations and seven gave neutral recommendations.

Revised recommendations

In November, three analysts revised their expectations.

  • BMO Nesbitt Burns’ Peter Sklar downgraded his recommendation to a “market perform” from an “outperform” and slashed his target price to $86 from $71.
  • RBC Dominion Securities’ Irene Nattel bumped her target price up by $1 to $106.
  • CIBC World Markets’ Mark Petrie trimmed his target price to $82 from $85.

In October, two analysts tweaked their target prices.

  • TD Securities’ Mike Van Aelst to $78 from $79.
  • Veritas Investment Research’s Kathleen Wong to $75 from $79.

Financial forecasts

The Street is expecting EBITDA of $4.98-billion in 2020, up from $4.91-billion reported in 2019, rising to $5.2-billion in 2021 and $5.4-billion in 2022. The consensus earnings per share estimates are $4.26 in 2020, up from $4.12 reported in 2019, and anticipated to rise to $4.92 in 2021 and $5.62 in 2022.

Earnings expectations for 2020 declined significantly from pre-COVID levels. However, earnings expectations for 2021 are only modestly lower. On Feb. 8, the consensus earnings per share estimates were $4.63 for 2020 and $5.00 for 2021.

Valuation

Many analysts value the stock using a sum-to-the-part (SOTP) methodology, applying different valuation metrics and multiples to Loblaw’s various business segments.

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According to Bloomberg, the stock is trading at a price-to-earnings multiple of 12.8 times the 2021 consensus estimate, in-line with its five-year historical average of 12.7 times. On an enterprise value-to-EBITDA basis, the stock is trading at a multiple of 7.2 times, below its five-year historical average of 8.8 times. Its industry peers have also experienced multiple contraction.

The average one-year target price is $78.82, suggesting there is nearly 25 per cent upside potential over the next 12 months. Target prices range from a low of $71 to a high of $106 (from RBC’s Irene Nattel).

Individual price targets updated by 11 analysts after the company released its third-quarter earnings results are: three at $71, two at $75, $76, $78, $80, two at $82, and $106.

Insider transactions

Quarter-to-date, one insider has reported trading activity in the public market.

On Nov. 20, director William Downe purchased 4,000 shares at a price per share of $63.855, increasing this specific account’s position to 20,000 shares. The cost of this investment exceeded $255,000.

Chart watch

In April, the share price was trading just pennies below its record closing high. However, since then, the share price has lost its positive price momentum.

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Year-to-date, the stock is a laggard, underperforming its industry peers as well as the S&P/TSX composite index. Year-to-date, Loblaw’s share price is down over 5 per cent while the stock prices of its grocery peers, Empire Company Limited (e.g. Sobey’s grocery chain) and Metro Inc. are up 17 per cent and 10 per cent, respectively. Meanwhile, the S&P/TSX composite index is up 3 per cent in 2020.

The relative strength index has declined to 33 with the stock nearing oversold territory. Generally, an RSI reading at or below 30 reflects an oversold condition.

The share price has yet to stabilize but the share price may soon find a floor or bottom. Should the stock price continue to decline, there is initial technical support around $62.50, and there is very strong technical support around $60.

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.

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A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Tuesday's breakout stocks

Positive BreakoutsDec. 7 close
AW-UN-TA&W Revenue Royalties Income Fund $33.90
ATZ-TAritzia Inc. $25.17
ATA-TATS Automation Tooling Systems Inc $22.50
BTE-TBaytex Energy Corp $0.77
BCE-TBCE Inc $57.54
BBU-UN-TBrookfield Business Partners LP $51.10
DOO-TBRP Inc $80.11
BU-TBurcon NutraScience Corp $3.11
CCO-TCameco Corp $15.55
CF-TCanaccord Genuity Group Inc $9.97
CEU-TCanadian Energy Services & Technology Co $1.24
CIA-TChampion Iron Ltd. $4.85
CHE-UN-TChemtrade Logistics Income Fund $5.23
CM-TCIBC $111.88
CSW-A-TCorby Spirit and Wine Ltd $16.75
CPG-TCrescent Point Energy Corp $2.75
DML-TDenison Mines Corp $0.68
DIV-TDiversified Royalty Corp $2.43
DRM-TDREAM Unlimited Corp $20.31
DND-TDye & Durham Ltd. $36.17
EFR-TEnergy Fuels Inc $3.64
XTC-TExco Technologies Ltd $8.99
FRU-TFreehold Royalties Ltd $5.26
HWX-THeadwater Exploration Inc. $2.07
HIVE-XHIVE Blockchain Technologies Ltd. $1.41
HSE-THusky Energy Inc $5.92
IGM-TIGM Financial Inc $35.16
LAS-A-TLassonde Industries Inc $169.69
LGT-B-TLogistec Corp $38.52
MAL-TMagellan Aerospace Corp $10.65
MG-TMagna International Inc $82.61
MOZ-TMarathon Gold Corporation $2.84
MMED-NEMind Medicine Inc. $2.65
MI-UN-TMinto Apartment REIT $19.65
TPX-B-TMolson Coors Canada Inc. $61.40
MSI-TMorneau Shepell Inc $30.50
NXE-TNexGen Energy Ltd. $3.19
NWH-UN-TNorthWest Healthcare Properties REIT $12.56
NVEI-TNuvei Corporation $61.50
OTEX-TOpen Text Corp $59.06
OCO-XOroco Resource Corp. $1.95
POU-TParamount Resources Ltd $4.39
PL-TPinnacle Renewable Holdings Inc. $8.91
PLTH-CNPlanet 13 Holdings Inc. $7.74
PTM-TPlatinum Group Metals Ltd $5.09
PIF-TPolaris Infrastructure Inc. $18.88
PBL-TPollard Banknote Ltd. $26.44
PGM-XPure Gold Mining Inc. $2.73
RECO-XReconnaissance Energy Africa Ltd. $2.37
SCR-TScore Media and Gaming Inc. $1.76
SW-TSierra Wireless Inc $19.93
STLC-TStelco Holdings Inc. $18.02
SYZ-XSylogist Ltd. $11.33
TVE-TTamarack Valley Energy Ltd. $1.04
TCS-TTECSYS Inc. $45.40
T-TTELUS Corp $25.65
TER-CNTerrAscend Corp. $13.44
TIH-TToromont Industries Ltd $91.65
TOT-TTotal Energy Services Inc $3.44
U-TUranium Participation Corp. $4.36
VET-TVermilion Energy Inc $5.98
WJX-TWajax Corp $18.12
WCP-TWhitecap Resources Inc $4.30
Negative Breakouts
L-TLoblaw Cos Ltd $63.20
MMX-TMaverix Metals Inc. $6.39
MRU-TMetro Inc $59.03

Source: Bloomberg

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