There's no doubt that October was a devastating month for the majority of companies trading in Toronto. With the S&P/TSX composite index down 17 per cent, only four companies posted gains in the double digits. George Weston Ltd. led the pack with a 19.5-per-cent gain.
What does Weston do?
The company and its subsidiaries - Loblaw Cos. Ltd. and Weston Foods - process and distribute foods. Weston Foods is involved in the baking industry (think Wonder Bread), while the publicly traded Loblaw (George Weston Ltd. is the majority shareholder with 61 per cent of the grocer's shares) runs grocery stores.
What have its shares done?
The company closed September at $51.46 and closed Friday at $61.51. The six analysts who follow the shares, according to Bloomberg, have a 12-month average price target of $61.20. Half rate it a "buy," the other half a "hold." Weston's common shares paid a 35-cent dividend in September.
The company reports its third quarter on Nov. 18, with analysts expecting $1.37 a share. It earned $1.03 a share in the same quarter last year.
Why have shares moved
so far, so fast?
While consumer-staples companies such as Weston and Loblaw typically perform well when the economy gets ugly, investors gave Weston an extra boost in October after it announced a deal to sell its Neilson dairy unit to Canada's biggest cheese maker, Saputo Inc., for $465-million. The money will be used for general corporate purposes, the company said, and to pay off a $250-million medium-term note that comes due in February.
The sale is one of several Weston has made in recent years as it turned its focus completely toward groceries and baking.
"Over the past 10 years, Weston has sold its forest products division (E. B. Eddy), Connors Brothers (seafood cannery), Heritage Salmon (farmed salmon), and now Neilson," Scotia Capital's Ryan Balgopal wrote in a note to clients.
What else has helped?
With Neilson out of the picture, Scotia Capital points out that Weston Foods now generates about 75 per cent of its business in U.S. dollars. The Canadian dollar has traded as high as $1.10 relative to the greenback in the last year, but is now back around the 80-cent mark. For every 10-cent movement in the Canadian dollar, Weston Food's gains or loses about 25 cents a share, after tax.
"Obviously, this has been a headwind for the company over the past few years as the Canadian dollar has strengthened," Mr. Balgopal said. "We are now poised for a reversal of fortune given the precipitous decline in the Canadian dollar."
Declining commodity prices should also help the baker, with wheat coming down from highs set earlier in the year.
While the company has raised its prices to deal with more expensive ingredients, analysts don't expect it to reduce prices as commodities come down.
What about Loblaw?
While turnaround efforts are starting to add to profits at the company's grocery stores, Loblaw executive chairman Galen G. Weston said the company was "not yet operating as an effective selling organization" when it reported its last quarterly results. Loblaw is focusing on renovating conventional stores and improving service in Ontario, expanding its network of No Frills stores, as well as improving its supply-chain management.
In its last quarter, profit rose 17.6 per cent to $140-million, or 51 cents a share, from $119-million, or 43 cents, a year earlier on lower restructuring charges.
But, the company said, operating profit was actually down after one-time charges were stripped out.
During the quarter, George Weston said it took a charge of 2 cents per common share for restructuring plans at both its Weston Foods and Loblaw divisions.
Loblaw shares closed at $29.35 Friday; the 12-month average price target of the 12 analysts who follow the shares is $31.33, according to Bloomberg.
"Continued operational difficulties at 61-per-cent-owned Loblaw Cos. Ltd., as well as ongoing weakness in the U.S. food retail segment and realignment of the U.S. baking industry, could result in earnings growth that is lower than anticipated, which could negatively impact Weston's share price performance," RBC Dominion Securities Inc. analyst Irene Nattel wrote in a note to clients.
***
Weston, a winner
Top 10 gainers from TSX composite in October
| George Weston | 19.5% |
| Gildan Activewea | 18.8% |
| Alimen Couche-B | 16.5% |
| Can Utilities-A | 11.7% |
| Telus | 9.5% |
| Fortis | 9.4% |
| Manitoba Telecom | 8.5% |
| CML Heatlthcare | 8.1% |
| Empire | 7.9% |
| Laurentian Bank | 7.6% |
KATHRYN TAM/THE GLOBE AND MAIL
SOURCE: BLOOMBERG, THOMSON DATASTREAM
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