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On today’s TSX Breakouts report, there are 42 stocks on the positive breakouts list (stocks with positive price momentum), and 18 securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that had been in a downturn in recent weeks and neared oversold territory with a relative strength index (RSI) reading of 36.5 on Nov. 15. Generally, an RSI reading at or below 30 reflects an oversold condition. However, the recent negative price momentum appears set to reverse its course after the company released better-than-expected third-quarter financial results before the market opened on Wednesday.

The company highlighted today is Loblaw Companies Ltd. (L-T).

A brief outline on Loblaw 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 that include 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

  • Strong management team.
  • Industry leader.
  • High exposure to discount stores. Discount stores represent approximately 60 per cent of the company’s supermarket sales.
  • Attractive earnings growth. Adjusted earnings per share came in at $5.59 in 2021, $4.18 in 2020 and $3.87 in 2019. The Street is forecasting earnings per share of $6.67 in 2022 and 7.33 in 2023 as of Nov. 15.
  • Strong balance sheet. $1.7-billion of cash and short-term investments at the end of the third-quarter.
  • Reliable dividend income and dividend growth.
  • Actively repurchasing shares. Provides a degree of downside support.
  • Reasonable valuation.

Quarterly earnings results and outlook

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

Consolidated revenue increased 8.3 per cent. Food retail same-store sales increased 6.9 per cent. Drug retail same-store sales climbed 7.7 per cent (pharmacy sales rose 4.7 per cent and front store sales grew 10.7 per cent). The company reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $1.846-billion, up 10.3 per cent year-over-year. Adjusted earnings per share came in at $2.01, up 26 per cent year-over-year, and surpassing the consensus earnings per share estimate of $1.96.

In the earnings release, chairman and president Galen Weston said, “In a difficult economic environment, Loblaw is putting the strength of its unique assets to work for Canadians, offering record loyalty rewards, unmatched private-label brands, the best discount stores and an inflation-fighting price freeze. Customer expectations for value have never been higher and we are working hard to meet them.”

Management raised its earnings outlook now calling for adjusted earnings per share to grow in the high-teens in 2022, up from its prior guidance of growth in the mid-to-high teens.

Management is hosting an earnings call at 10 a.m. ET.

Returning capital to shareholders

Management is committed to returning capital to its shareholders.

In May, management announced an 11 per cent dividend increase, its 11th consecutive annual increase, taking its quarterly dividend up to 40.5 cents per share, or $1.62 per share yearly. This equates to a current annualized yield of 1.5 per cent.

During the third quarter, the company repurchased over 3.4-million shares at a cost of $403-million as part of its share buyback program. The prior quarter, the company repurchased over 5-million shares as part of its share buyback program. Year-to-date, the company has repurchased 10.1-million shares at a cost of $1.158-billion.

Analysts’ recommendations

Analysts’ recommendations are mixed.

After the company released its second-quarter financial results, 11 analysts issued research reports, of which seven analysts issued buy-equivalent recommendations, three analysts issued neutral recommendations and one analyst (Morningstar’s Dan Wasiolek) maintained his “sell” recommendation.

Revised recommendations

In November, three analysts raised their target prices ahead of the third-quarter earnings release.

  • ATB’s Kenric Tyghe by $5 to $135.
  • RBC’s Irene Nattel to $160 (the high on the Street) from $154.
  • TD Securities’ Mike Van Aelst to $135 from $130.

Financial forecasts

Given the solid third-quarter earnings results, many analysts may revise their earnings expectations higher.

Prior to Wednesday’s release, the Street was expecting EBITDA of $6.09-billion in 2022, up from $5.587-billion reported in 2021, rising to $6.295-billion in 2023. The consensus earnings per share estimates are $6.67 in 2022, up from $5.59 reported in 2021, and anticipated to rise to $7.33 in 2023.

Earnings expectations have been moving higher. Four months ago, the consensus EBITDA estimates were $5.976-billion for 2022 and $6.178-billion for 2023. The consensus earnings per share estimates were $6.39 for 2022 and $6.99 the following year.

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.

As of Nov. 15, the stock is trading at a price-to-earnings multiple of 14.6 times the current 2023 consensus estimate, slightly above its 10-year historical average of 13.1 times, according to Bloomberg. Its grocery store peers, Metro Inc. (MRU-T) and Empire Company Ltd. (EMP-A-T) are trading at 16.4 times and 10.5 times, respectively.

On an enterprise value-to-EBITDA basis, the stock is trading at a multiple of 8 times, slightly below its 10-year historical average of 8.4 times. Its industry peers, Metro and Empire are trading at 10.7 times and 6.3 times, respectively.

The average one-year target price is $128.20, suggesting there is nearly 20 per cent upside potential over the next 12 months. Target prices range from a low of $90 (from Morningstar’s Dan Wasiolek) to a high of $160 (from RBC’s Irene Nattel). Prior to the release of the third-quarter financial results, target prices were: $90, $123, $124, $125, $126, $128, $130, two at $135, $136 and $160.

We may see several analysts adjust their target prices over the next day or two in light of the better-than-expected third-quarter results.

Insider transactions

Quarter-to-date, there has not been any trading activity in the public market reported by insiders.

Chart watch

Month-to-date, defensive stocks have lagged. The S&P/TSX consumer staples (sector) index is up just 0.6 per cent, underperforming the S&P/TSX composite index, which is up 2.9 per cent. The S&P/TSX utilities (sector) index is the worst performing sector, down 3.3 per cent so far this month. Shares of Loblaw have declined 4 per cent, making it the worst performing consumer staples stock in the S&P/TSX composite index.

On Nov. 15, the relative strength index declined to 36.5 with the stock nearing oversold territory. Generally, an RSI reading at or below 30 reflects an oversold condition.

In terms of key technical resistance and support levels, the stock has a major ceiling of resistance between $120 and $124 (close to its record closing high of $124.20 set on Aug. 17). Looking at the downside, the stock has initial support around $105. Failing that, there is technical support around $100 and then around $90.

ESG Risk Rating

According to risk provider Sustainalytics, Loblaw has an environmental, social and governance (ESG) risk score of 20.5 as of September 6, 2022. A risk score of between 20 and 30 reflects a “medium risk” rating.

POSITIVE BREAKOUTSNov.15 close
AGF-B-TAGF Management Ltd $6.86
AGI-TAlamos Gold Inc $11.88
CAE-TCAE Inc $29.11
CNQ-TCanadian Natural Resources Ltd $82.80
CET-TCathedral Energy Services Ltd $1.34
CDAY-TCeridian HCM Holding Inc. $96.40
CIA-TChampion Iron Ltd. $5.45
CPG-TCrescent Point Energy Corp $11.40
DSG-TDescartes Systems Group Inc $97.18
DRM-TDREAM Unlimited Corp $31.28
ERF-TEnerplus Corp $25.47
ESI-TEnsign Energy Services Inc $3.98
EQB-TEquitable Group Inc $55.80
EXRO-TExro Technologies Inc. $1.58
HRX-THeroux-Devtek Inc $13.68
IAU-Ti-80 Gold Corp. $3.09
KRR-TKarora Resources Inc. $4.14
KXS-TKinaxis Inc $158.63
LIF-TLabrador Iron Ore Royalty Corp $32.17
MG-TMagna International Inc $84.25
MAGT-TMagnet Forensics Inc. $33.07
MFI-TMaple Leaf Foods Inc $24.23
MRE-TMartinrea International Inc $11.47
NGD-TNew Gold Inc $1.50
NXE-TNexGen Energy Ltd. $6.18
OVV-TOvintiv Inc. $77.67
POU-TParamount Resources Ltd $32.26
PEY-TPeyto Exploration & Development Corp $14.82
PSK-TPrairieSky Royalty Ltd $21.74
RY-TRoyal Bank of Canada $131.78
SIS-TSavaria Corp. $14.63
SCL-TShawCor Ltd $11.34
SHOP-TShopify Inc. $53.40
SDE-TSpartan Delta Corp. $14.86
SJ-TStella-Jones Inc $46.94
SU-TSuncor Energy Inc $49.19
TFII-TTFI International Inc. $139.69
LCFS-TTidewater Renewables Ltd. $11.93
TLRY-TTilray Brands Inc. $5.57
TOT-TTotal Energy Services Inc $9.15
TCW-TTrican Well Service Ltd $4.00
WRN-TWestern Copper and Gold Corp. $2.28
NEGATIVE BREAKOUTS
AQN-TAlgonquin Power & Utilities Corp $10.34
AR-TArgonaut Gold Inc $0.35
GBT-TBMTC Group Inc $11.75
BRAG-TBragg Gaming Group Inc. $4.18
BRE-TBridgemarq Real Estate Services $12.99
CUP-U-TCaribbean Utilities Company Ltd. $14.30
DNTL-Tdentalcorp Holdings Ltd. $6.09
DOL-TDollarama Inc $76.18
HLS-THLS Therapeutics Inc. $8.60
HUT-THut 8 Mining Corp. $1.90
QTRH-TQuarterhill Inc. $1.49
RECO-XReconnaissance Energy Africa Ltd. $1.73
SFTC-TSoftchoice Corp. $17.06
TOY-TSpin Master Corp. $32.40
SOY-TSunOpta Inc. $10.91
SYZ-TSylogist Ltd. $4.80
TIXT-TTELUS International Inc. $25.74
TC-TTucows Inc. $43.48

Source: Bloomberg

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 is not an investment recommendation.

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