Canaccord Genuity announced its top three Canadian consumer stocks to own in the new year on Tuesday.
Analyst Derek Dley favours consumer staples stocks over consumer discretionary stocks, noting several concerning industry conditions.
"Consumer confidence remains volatile, household debt to income levels are elevated, and the overall consumer spending environment appears cautious," he said.
As a result, two of his three top picks are in the consumer staples sector, Cott Corp. (BCB-T) and Maple Leaf Foods Inc. (MFI-T).
In 2016, shares of Cott made a round trip.
The stock price began the year around the $15 level, peaked at over $22 in August, before making a U-turn, turning south to its current level of just under $14.
For 2017, however, Mr. Dley anticipates a rebound for the share price and highlights five key reasons to own the stock.
First, he sees the company's margins expanding due to the growth initiatives that took place earlier this year, noting: "Cott truly had a transformational year in 2016, completing three acquisitions, and further transforming its business into a higher growth, higher margin operation with less exposure to declining legacy categories."
Second, he suggests the company's strong subscriber growth to its DS Services HOD (home and office delivery) platform with 68,000 net new customers added during the first three quarters of the year will lead to margin expansion and expects this growth momentum will continue.
Third, recent acquisitions may lead to additional avenues for growth along with synergies to be realized.
Fourth, he forecasts the company will realize an 18 per cent compound annual growth rate of 18 per cent in its free cash flow from 2017 through to 2019.
Finally, the stock's valuation, he argues, is compelling with the stock trading at an enterprise value-to-EBITDA (EV/EBITDA) multiple of 7.1 times his 2017 estimate, below the company's peer group average of 11.2 times. His target price is $24 (U.S.).
His second stock pick is Maple Leaf Foods.
The stock has delivered solid returns so far in 2016 with the company hitting its targeted earnings before interest, taxes, depreciation and amortization (EBITDA) target of 10 per cent earlier this year. As of Nov. 8, the share price had climbed nearly 24 per cent year-to-date. Post the U.S. presidential election, the share price has retreated 4 per cent with investors rotating into cyclical stocks and out of defensive stocks.
Mr. Dley's investment thesis for owning shares of Maple Leaf Foods is based on margin expansion, growth opportunities, as well as valuation. He forecasts additional EBITDA margin expansion with operational improvements continuing as the company, "continues to optimize its large scale Heritage prepared meats facility, reducing corporate costs, and invests capital in high return growth initiatives."
Also positive and providing downside support for the stock is the company's strong balance sheet with $430-million of net cash, allowing the company to remain active in its share buyback program, and providing the company with the financial flexibility to fund organic and acquisition growth. On a valuation basis, the stock is trading at a discount relative to its peers, at an EV/EBITDA multiple of 8.9 times his 2017 forecast, compared to its peer average of 11.3 times. His target price is $36, suggesting over 27 per cent upside potential in the share price.
Lastly, in the consumer discretionary category, Mr. Dley believes shares of BRP Inc. (DOO-T) will continue to reward investors.
Year to date, the share price is up over 42 per cent, closing at a record high for the year. He anticipates more moderate price gains going forward with his target price set at $33, equating to a price return of 16 per cent.
Key drivers for the stock are new product introductions, dealer additions, improving margins, its solid balance sheet, and multiple expansion. He also believes if management announces the renewal of its share buyback program, this would be a catalyst for the stock. The stock is currently trading at a EV/EBITDA multiple that is at a nearly 3 point discount relative to its peers, suggesting there is room for multiple expansion.
Jennifer Dowty