After “good” second-quarter results, National Bank Financial analyst Vishal Shreedhar said he’s maintaining a “favourable view” on Loblaw Companies Ltd.
However, he removed his “top pick” designation for the country’s largest grocery and pharmacy chain, believing “moderating inflation and slowing growth suggest that future share price gains may not be as outsized as in the last 1.5 years.”
“That said, L remains the preferred stock selection amongst grocers, given: (1) Benefits from management’s improvement initiatives; (2) Solid EPS growth (we forecast 16 per cent year-over-year in 2022); and (3) Potential structural benefits, including longer-term stronger grocery demand,” said Mr. Shreedhar.
Shares of Loblaw slid 3.8 per cent on Wednesday despite a beat across most key metrics as investors expressed concern about “light” food same-store sales growth (0.9 per cent versus Mr. Shreedhar’s 3.0-per-cent projection). Adjusted earnings per share rose to $1.69, up from $1.35 a year ago and above the estimates of both Mr. Shreedhar ($1.60) and the Street ($1.61).
“Relative to NBF, Food Retail sssg was light (this suggests market share losses; however, we believe L’s hard discount business is holding share), while Drug Retail sssg was stronger than anticipated,” the analyst said.
With the results, Loblaw raised his 2022 EPS guidance to growth mid-to-high teens from its prior expectations of low-double-digits. That led Mr. Shreedhar to “modestly” increase his forecast to $6.47 from $6.37 in 2022 and $7.03 from $6.93 in 2023.
“Management suggested inflation is peaking – we have previously proposed that grocery stocks do well during periods of heightened inflation,” he said. “As such, moderating inflation could suggest that the period of significant grocery outperformance versus the broader market is coming close to an end.”
Maintaining an “outperform” rating for the company’s shares, Mr. Shreedhar raised his target to $127 from $125 with an “outperform” rating. The average is $128.20.
Other analysts making changes include:
* Desjardins’ Chris Li to $124 from $116 with a “hold” rating.
“L’s solid 2Q results and full-year EPS guidance raise reflect continuing strong execution in a highly inflationary environment, and margin benefits from the return of higher-margin cosmetic and OTC sales and Rx volume growth. Focus will gradually shift to 2023. While deflation could be a headwind, we expect L’s retail excellence initiatives to achieve EPS growth of 10 per cent. Our Hold rating mainly reflects limited total return potential to our $124 target (7 per cent). We would look for a more attractive entry point,” said Mr. Hi.
* CIBC’s Mark Petrie to $136 from $129 with an “outperformer” rating.