George Weston Limited

George Weston Ltd (TSX: WN) is a holding company that operates through three subsidiaries encompassing retail, real estate, and consumer goods. The first is Loblaw, the largest grocer in Canada, second is Choice Properties, an open-ended real estate investment trust and the third is Weston Foods, a North American bakery.

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.
• Higher Leverage: The company’s debt to equity ratio at the end of June 2021 stood at 3.19x higher than the industry median of 0.78x. Additionally, it’s % LT Debt to Total Capital stood at 49.5% whereas industry median is of 27.5%. These factors imply higher balance sheet risks.
• 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 21.6 days against the industry median of 12.7 days.
• Higher average collection period: The company is having a higher average Accounts Receivable day of 25.8 days, against an industry median of 11.9 days. A higher average collection period indicates that an organization collects payments slower. This may create a difficulty for the company to have enough cash on hand to meet their financial obligations.
• Stretched Valuation: WN shares are available at an NTM PE multiple of 16.3x compared to the industry median of 11.6x, implying that the shares are overvalued against the industry.
• Trading near the upper band of the Bollinger Bands®: Recently, the stock witnessed a healthy rally on the daily price chart and has moved near to the 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 ~78.80 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): Price to Earnings

Stock recommendation

The company’s second quarter results demonstrated strong year-over-year growth in revenue, operating income and earnings per share, mainly driven by healthy performance from Loblaw. The spread of Delta variant instances, on the other hand, is creating a lot of uncertainty, and it might have an impact on the company's sales in the foodservice and retail sectors. Furthermore, the firm is heavily leveraged along with higher average accounts receivables day and a higher cash cycle day than the sector median, indicating significant balance sheet risk and poor working capital management, neither of which are favorable indicators. Additionally, the company is trading at overvalued levels compared to the industry, even the technical indicators point to a possible price correction or consolidation. As a result, we recommend a “Sell” rating on the stock at the closing price of CAD 135.70 on August 20, 2021, based on the above rationale and valuation. 

Cipher Pharmaceuticals Inc. 

Cipher Pharmaceuticals Inc (TSX: CPH) is a specialty pharmaceutical company. Its products include Dermatology Products, Hospital Acute Care Products, and Out-Licensed Products among others. The company's geographical segments include Canada and the United States.

Why Should Investors Book Profit?

• Higher average collection period: The company is having a higher average Accounts Receivable day of 103 days, against an industry median of only 67.3 days. A higher average collection period indicates that an organization collects payments slower. This may create a difficulty for the company to have enough cash on hand to meet their financial obligations.
• Higher Cash Cycle days: The company’s Cash Cycle (Days) is higher compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 198.1 days against the industry median of 131.9 days.
• Stretched Valuation: CPH shares are available at an NTM EV/EBITDA multiple of 2.4x compared to the industry (Pharmaceuticals) average of 1.2x. 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 above the 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 ~77.17 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 Sales 

Stock recommendation

The company’s second quarter results demonstrated strong sequential and year-over-year growth in revenue, EBITDA and earnings per share, driven by growth in its license and product portfolios. Furthermore, we assume the firm would have a bad liquidity profile in the near future since it has a higher average accounts receivables day and a higher cash cycle day compared to the industry median, which indicated poor working capital management and it is not a positive sign. Furthermore, the recent stock price rally has stretched the valuations of the company compared to the industry, even the technical indicators point to a possible price correction or consolidation. As a result, we recommend a “Sell” rating on the stock at the closing price of CAD 2.37 on August 20, 2021, based on the above rationale and valuation.

*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.