Risks flagged for Jean Coutu Group

Jean Coutu Group Inc. was downgraded to underweight from equal weight at Barclays as more risks related to drug reforms, coupled with IT and supply chain changes, are expected to limit earnings upside in the next couple of years.

Analyst Jim Durran, who also trimmed his price target on the stock to $23 from $24, noted the Quebec pharmacy chain has rewarded investors well in recent years due to the flight-to-safety trade and the recent pullback in oil prices.

Those factors drove Jean Coutu’s valuation to a normalized peak of 22x earnings in mid-April, setting the stage for the stock to underperform its peers in the next 12 months.

“We believe the Ontario government’s announcement, as part of the 2015 provincial budget, that they will be pursuing further cost reductions within the Ontario Drug Benefit program has added risk to PJC’s outlook as it provides the Quebec government with additional support for their cost reduction efforts and some immediate wins,” Durran told clients.

He also noted that Jean Coutu is set to transition its corporate systems and stores to new technology platforms, and move its headquarters and primary distribution centre. Both changes will ultimately improve the company’s productivity and growth capacity, but the analyst cautioned that they are not without risks associated with implementation and higher expenses.

“These factors are expected to at minimum erode potential earnings growth while presenting investors with uncertainty risk until they are complete,” he said.