This morning's G&M Desjardins Securities analyst Chris Li expects consumer stocks to remain volatile in 2022 creating “attractive buying and selling opportunities” for investors
“Clear winners are difficult to identify for two reasons. First, Omicron, supply chain disruptions, inflationary pressures and normalization of consumer behaviour post-pandemic pose risk to earnings. Second, while we expect the grocers to benefit from rising food inflation and a rotation to defence (Omicron) in the near term, we believe this is largely reflected in their premium valuation (
and
),” he said in a research report released Monday.
With that view, he named Dollarama Inc. (
) and
Alimentation Couche-Tard Inc. (
) his “top picks” for the next year, citing “relatively better earnings visibility and trade in line with/below historical valuation.”
For Dollarama, he sees “multiple levers to drive attractive earnings growth,” projecting gains of at least 20 per cent in 2022.
That led him to raise his rating for the discount retailer to “buy” from “hold” with a target price of $72. The average on the Street is $64.54, according to Refinitiv data.
“While we may be early with our upgrade (to Buy from Hold) given margin uncertainty from inflationary pressures and the recent surge in COVID-19 cases, we believe they are manageable,” said Mr. Li. “Our recent pricing survey shows a continuing attractive price gap between DOL and its key competitors. This supports flexibility for SKU refresh/mark-ups to offset cost pressures. FX hedging tailwinds and lower COVID-19 expenses will also help. We believe DOL is well-positioned to generate 20-per-cent EPS growth next year (highest in our coverage) and mid-teens percentage growth longer-term, with upside from the introduction of higher price points ($4.50 and $5.00). Valuation is reasonable at 23.1 times forward P/E (vs approximately 25-times five-year average). We believe there is potential for valuation to improve as it becomes increasingly clear that the inflationary pressures are manageable.”
Mr. Li has a “buy” rating and $56 target for Couche-Tard shares. The average is $57.88.
“While the market may be concerned about U.S. labour challenges and inflationary pressures, we believe they are manageable and that ATD is on track to generate attractive organic growth, supported by its robust pipeline of growth initiatives (see our report) and improvement in morning daypart traffic,” the analyst said. “While we expect ATD to achieve its organic EBITDA target of US$5.1-billion in FY23 (in line with management’s conservative target), the market is more cautious, with consensus expecting only US$4.9-billion (US$4.4–5.1-billion). Better earnings visibility should be a catalyst. ATD’s strong FCF and balance sheet support value creation through share buybacks and/or acquisitions. Valuation is reasonable at 15.3 times forward P/E vs the historical average of 17 times, supported by 10-per-cent-plus long-term organic EPS growth.”