Metro's price looks right for investors with a low appetite for risk

The grocery chain can be attractive to defensive investors turned off by the energy-led downturn.

Kirk Paulus 30 December, 2014 | 6:00PM
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Low-beta, blue-chip stocks are a good option for defensive-minded investors who are concerned about the mid- to long-term market outlook. Among those worth considering are Metro Inc. MRU and Loblaw Companies Ltd. L, two of the largest Canadian grocery chains.

Canada is a very concentrated market that is dominated by natural resources and financial services. Both sectors are highly cyclical. By contrast, consumer-staples companies tend to be much more resilient during market downturns and continue to be solid performers during boom times.

Of the two grocery chains, Metro is currently the more compelling investment. Strong fundamentals and low volatility versus the market is exactly the type of investment that defensive investors would want during the energy-led downturn that the Canadian stock market is currently experiencing.

With success in lowering costs and improving margins, Metro has achieved better than expected earnings. In the most recent fourth-quarter report, announced on Nov. 19, Metro beat earnings expectations by 10 cents a share. This is reflected in strong quarter-over-quarter earnings improvements as well as upward revisions to analysts' forecasts for earnings and target prices on aggregate.

Metro also rates favourably compared to its industry, with a forward one-year price-earnings ratio of 15.6, versus an industry average of 18 and a forward return on equity of 18.6% versus the average of 15.4%. The strong forward PE reflects market expectations for future earnings, and the above- average ROE stands out in the industry, especially since Metro is performing this strongly with a relatively low debt-to-equity multiple of 0.4. The company's ROE may be even further enhanced through increasing leverage.

As a result of these strong attributes, Metro should be considered a Buy to investors seeking low-volatility growth stocks and/or stocks exhibiting high levels of earnings and price momentum.

Loblaw doesn't rate as favourably -- it's forward PE is 16.9, which is pricier than Metro's, and the ROE in 2015 is projected to be 11.4%, lower than Metro. These aren't perfect comparisons, since Loblaw has a wider product offering. However, concern has been raised over integration issues relating to its Shoppers Drug Mart acquisition, which closed earlier this year. Usually, these major transactions are based on the realization of many synergies. Historically and on average, companies tend to overpay for major acquisitions, although in the long term they may prove to pay off.

Unlike Loblaw, Metro is a pure play on investing in grocery chains, compared to Loblaw's more varied product line which includes clothing and pharmacists' products and services. Metro is also a more defensive stock; it's beta of 0.4 is much lower than Loblaw's 0.7.

Even in a more recession-proof industry like grocery retailing, Metro and Loblaw face potential threats. Among them is Wal-Mart Stores Inc. WMT, a formidable low-cost competitor. However, Canadian incumbents have faced foreign competition and survived some aggressive expansion into Canada years ago, while continuing to hold market share.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Loblaw Companies Ltd147.30 CAD0.59Rating
Metro Inc73.92 CAD-0.22Rating
Walmart Inc59.62 USD0.05Rating

About Author

Kirk Paulus

Kirk Paulus  Kirk Paulus is an equity data analyst with the CPMS division of Morningstar. He holds a Bachelor of Business Administration degree from the Schulich School of Business at York University. He can be reached at kirk.paulus@morningstar.com but cannot provide individual advice.

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