‘GLORY DAYS’ AS LOBLAW, METRO UPGRADED

Canadian supermarkets are having a great year, and CIBC World Markets expects the strong run will continue in 2016. “Canada remains one of the most favourable markets in the world for supermarkets,” said analyst Perry Caicco, upgrading both Loblaw Cos. Ltd. and Metro Inc. to sector outperformer. “It now looks like the glory days will extend into 2016, and possibly beyond.”

He noted that multiples in the grocery space are generally higher than historical averages, but the Canadian consumer is holding up nicely and spending is up.

Caicco also thinks calmer market conditions and postconsolidation pricing stability could drive outsized earnings expansion for the next 18 to 24 months. He noted that after several years of square-footage growth driven by increased competition, new entrants, acquisitions and discount-oriented consumers, most indicators have improved and financial results generally have, too. As this growth has moderated, so has competition, and that has led to stronger earnings.

“Sometimes, multiples can be reflective of the weak denominators, but at this point, the grocers are actually in strong earnings recovery and momentum, and the multiples are predicting — rightly so, we believe — the possibility of positive earnings revisions,” the analyst said.

Although there has been little growth in disposable income, Canadian consumers are still spending slightly more on food. They continue to seek out deals and buy roughly 35 per cent of their food on promotion, but Caicco noted that these products are less deeply discounted than before.

The analyst’s price target on Loblaw climbs to $89 from $71, but since the company no longer separates EBITDA of its grocery and pharmacy businesses, he uses the valuation of other industry leaders.

The price target on Metro moves to $42 from $37.50.

“Metro continues to do everything in its power to engineer earnings as well as responsible returns for shareholders,” the analyst said. “That discipline is reflected in very strong multiples, and the combination of continued dividend increases and sizeable share buybacks has commanded respect from investors.”