Loblaw Companies Ltd

Loblaw Companies Ltd (TSX: L), is one of Canada's largest grocery, pharmacy, and general merchandise retailers which operates through two segments: Retail and Financial Services. The firm's controlling shareholder is George Weston Limited, which owns 52% of the equity.

Why Should Investors Book Profit?

• Increasing uncertainties: The resurgence in Delta variant cases is throwing a lot of uncertainties, it could impact the company’s sales in foodservice and retail sector as government could reinforce some mandated lockdowns to counter the spread. In Q2 2021, the company witnessed lower same store sales.
• Poor inventory management: In Q2 2021, the company’s inventory turnover ratio stood at 1.7x against an industry median of 2.9x. Low inventory turnover indicates weaker sales and declining demand for a company's products. On the flip side, it is having higher average inventory days of 50.7 days against an industry median of 31.6 days, indicating the company's cash is tied up in inventory for a longer period, meaning it cannot be deployed for other purposes.
• Higher Cash Cycle days: The company is holding higher Cash Cycle (Days) compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 26.2 days against the industry median of 11.7 days.
• Stretched Valuation: The company’s shares are available at an NTM Price/Cash Flow multiple of 6.4x compared to the industry (Consumer Non-Cyclical) average of 2.6x. This implies that the shares are overvalued against the industry.
• Trading above the upper band of the Bollinger Bands®: Recently, the stock witnessed a healthy rally on the daily price chart and has moved close to upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~74.91 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

Recently the stock generated healthy rally after some restrictions were called off by the government, but the Company's near-term consumer outlook remains highly influenced by the COVID-19 pandemic as the delta variant is surfacing at a higher speed and the government might again come with some restrictions to counter the delta variant. Furthermore, the company is having a poor inventory management along with higher cash cycle days, which could lead to poor liquidity profile. Moreover, the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 89.11 on September 1, 2021. 

Primo Water Corporation

Primo Water Corporation (TSX: PRMW) is a leading pure-play water solutions provider in North America, Europe and Israel. The company’s water solutions ecosystem is anchored by an assortment of water dispensers and its water direct business, helping them generate approximately USD 2.1 billion in annual revenue.

Why Should Investors Book Profit?

• Lower margin profile v/s Industry: In Q2 2021, the Company failed on maintaining its pace and witnessed lower performance across operating matrix against the industry, which exhibits the pressure on company.
• Poor liquidity profile: In Q2 2021, the company's current ratio was 0.83x compared to the industry median of 1.61x. While its Quick ratio was also on the lower side at 0.69x V/s 1.16x. Both these lower ratios against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.
• Longer cash cycle: The company is holding higher Cash Cycle (Days) compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 77.8 days against the industry median of 19.5 days.
• Stretched valuation: PRMW shares are available at an NTM Price/Cash Flow multiple of 8.5x compared to the industry (Consumer Non-Cyclical) average of 2.6x. This implies that the shares are highly overvalued against the industry. The stock is overvalued on multiple valuation parameters. The table below reflects the picture.

• Higher leverage: The company’s debt to equity ratio at the end of June 2021 stood at 1.12x, higher than the industry median of 0.81x. Additionally, it’s % LT Debt to Total Capital stood at 47.0% whereas industry median is of 31.0%. These factors imply higher balance sheet risks.
• Technical indicators are suggesting potential price consolidation: Recently, the stock witnessed a healthy rally on the daily price chart and has moved close to the upper band of the Bollinger Bands®, indicating the stock is perhaps overbought and due for a price correction or a consolidation.

Source: REFINITIV, Analysis by Kalkine Group

Stock recommendation

Despite a difficult operating environment and increased lockdown measures in many of the geographies the company serves, it generated good topline and adjusted free cash flow growth. As the delta variant is surfacing at a higher speed and the government might again come with some restrictions, to overcome this the group is concentrating on growing its client base in the residential to small and medium-sized business sectors. However, the company is having higher cash cycle days, which could lead to poor liquidity profile, also the stock is trading on highly stretched valuation and the company has higher leverage along with higher % LT Debt to Total Capital than the sector median, indicating significant balance sheet risk. Moreover, the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale, we recommend a “Sell” rating on the stock at the closing price of CAD 22.61 on September 01, 2021.

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.