July 29, 2020
Loblaw Companies Limited
Express lane: Survey results underscore strong positioning and outlook. Raising PT to $105
Our view: Results of our first What Matters in Grocery survey underscore Loblaw’s strong relative positioning across key attributes and leading position in eGrocery, favourable long-term outlook. We raise our price target by $15 to $105 on warranted multiple re-rating.
Key points:
All the right stuff, where it matters
Results of our first What Matters in Grocery survey reveal that Loblaw is positioned extremely well in key attributes that influence consumer choice of both online and bricks & mortar grocer. This morning, in our Fusion note “E-grocery moves into the Express lane”, we published the results of a survey conducted in mid-June in which we asked >1,000 Canadian grocery shoppers about what matters to them: Where they shop and how they shop both online and in-store, what they buy where online, loyalty program membership, where they find the promotions they want, etc. The results point to clear market leadership for Loblaw across virtually all metrics, including online.
2025 pole position: PT to $105 on target multiple re-rating
Shifting competitive dynamics and foundational investments put Loblaw in pole position looking ahead to 2025. Whereas the expansion of Walmart and Costco and the ensuing tonnage shift during the 2006–16 period was a significant headwind to all traditional grocers, accelerating penetration of eGrocery presents an opportunity for all incumbents to grab share of volume transitioning online.
Against this backdrop, proactive investment in innovation capital was, and remains, of paramount importance to rising above the pack. The foresightedness of Loblaw’s strategic investment areas—Everyday Digital Retail, Payments & Rewards and, over the medium term, Connected Healthcare—is already proving to be key in its ability to increase share of basket. Over the short term, Loblaw has already accelerated online presence, with penetration estimated in high-single digits during the pandemic. Over the medium term, proactive work on digitization of health care in Canada should enable the company to take leadership as the situation evolves. In our view, as the company pulls away from the competitive set in terms of offering and how it goes to market, investors should increasingly differentiate between Loblaw and the rest of the field.
Survey results provide even more justification for a re-rating; raising target multiple from 9x to 10x. We have long argued that Loblaw’s relative earnings, returns, and FCF conversion justified a narrowing of the valuation gap to peers. Findings and insights from our survey, in our view, add critical points of differentiation, bolstering our argument that the current trading multiple (<8x NTM EBITDA) fails to properly capture the L’s competitive positioning and structural advantages/capabilities.