What are we looking for?
Grocery shares in aisle three! The food-retailing sector attracted some unwanted attention this week when both Loblaw Cos. Ltd. and Metro Inc. reported underwhelming results. Their stock prices tumbled as investors realized that the sector they had depended on for stable profits might actually be more volatile than they had realized.
Sometimes, though, marked-down merchandise can be a great deal. (Just ask any grocer.) So we decided to go browsing amid the continent's leading food retailers to see if any bargains might be in the offing.
How we did it
We looked for food retailers based in Canada or the United States with at least $5-billion (U.S.) of annual revenue. We then compared them on some simple measurements of value and growth and listed them by year-to-date returns.
What we found
It has been a surprisingly good year for investors in grocery and food retailers. Out of the 15 stocks that qualified for our list, nine have produced year-to-date returns of more than 30 per cent.
The local heroes include Empire Co. Ltd., owner of the Sobeys chain, and Alimentation Couche-Tard Inc., the Quebec-based operator of convenience stores. But they pale in comparison to some of their U.S. counterparts, such as SuperValu Inc., Safeway Inc. and Kroger Co. If Wal-Mart is eating the grocery business, someone forgot to tell these companies.
So should you put some grocery shares in your shopping cart? Our chart depicts the problem: By and large, these stocks don't look all that cheap when judged by price-to-earnings (P/E) ratios or enterprise value to earnings before interest, taxes, depreciation, depreciation and amortization (EV/EBITDA).
Also worrisome is the slow-growth nature of much of the grocery business. Many of these companies are grappling with average revenue growth of less than 5 per cent a year.
The brightest spot in the industry is health food. United Natural Foods Inc. and Whole Foods Market Inc. have growth rates well above their more traditional peers. Problem is, both are also more expensive than their peers in terms of P/E and EV/EBITDA.
All of that suggests investors should be cautious. By and large, these are pricey stocks with less than inspiring growth prospects. Discerning shoppers may decide to wait for more tempting markdowns.
Ian McGugan