Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients. mike@mikebowmangroup.com
What are we looking for?
Three of the largest U.S. food retailers, Wal-Mart Stores Inc., Costco Wholesale Corp. and Target Corp., have taken up residence in the Canadian grocery store landscape, but how do they compare with other companies in this fiercely competitive industry?
The screen
My colleague Rob Belanger and I started with food retailing companies larger than $300-million in market capitalization, and we sorted them from largest to smallest. If a company sold any kind of food, it was included.
The price-earnings ratio (price divided by the per-share earnings) is best used to compare companies in the same industry, as we have done here. Ideally, we are looking for a low number.
Price-to-sales is another valuation ratio that compares the company's stock price with its revenue. A low ratio may indicate possible undervaluation, while a ratio that is significantly above the average may suggest overvaluation.
COGS to sales (cost of goods sold divided by sales) shows the percentage of sales revenue used to pay for expenses which vary directly with sales. The lower the better.
Inventory turnover is an efficiency ratio and measures the number of times the inventory is sold and replaced during the fiscal year. We are looking for a high number.
To round out the screen, we also noted the number of retail outlets, and the sales growth in the past 12 months.
What did we find?
Roundy's Inc. was founded in Milwaukee in 1872, and serves Wisconsin, Minneapolis and the Greater Chicago area. The company has the lowest P/E ratio on our screen.
Whole Foods Market opened its first store in Austin, Tex., in 1980. Today, it has more than 360 locations in North America and Britain. Based on P/E, the company is the most overvalued on our screen.
Not only is Roundy's the smallest company, it is the most undervalued when looking at the price-to-sales ratio. The most overvalued is Dollarama.
Metro Inc., Supervalu and Target all have negative sales growth, while Alimentation Couche-Tard Inc. has the highest sales growth, and it also scores the highest in the inventory turnover category.
The COGS-to-sales category was dominated by the dollar stores, Whole Foods Market and Fresh Market Inc., which has 150 stores in the United States.
Investors should conduct further research before investing.