Loblaw Companies Ltd (TSX:L) is a very difficult stock to classify today, in my opinion. Grocery retail is generally viewed as a highly defensive sector (everyone needs toilet paper).
However, Loblaw has traditionally been ascribed a relatively juicy valuation multiple in the past due to its ability to make large acquisitions and integrate a range of companies such as Shoppers Drug Mart into its corporate structure. These characteristics mean Loblaw is a unique company that is hard to place in a "value" or "growth" bucket, as it has a hybrid business model and valuation, in my view.
Loblaw’s stock price volatility since the COVID-19 pandemic hit reflects lumpiness in the company’s earnings reports. In April, Loblaw reported a substantial revenue and profit surge amid unprecedented demand.
At the time, everyone seemed to think stocking up on toilet paper and bottled water would help defend against the plague. In July, the company reported a slight decrease in this momentum, as profit slid due mainly to costs tied to the COVID-19 surge (i.e. hero pay for workers, additional signage, plexiglas dividers, etc.)
I think Loblaw still represents a highly defensive name with strong long-term growth upside, and has a valuation today which remains at a discount to some of its peers. The company’s Shoppers Drug Mart business is strong, and I do think we could see a rebound in profitability over the medium-term, making this a great stock to add to your watch list today.
Invest wisely. my friends.
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