EUR 850.00 For Business Accounts Only

Morningstar | Metro Serves Up Fair End to Fiscal 2018, but Headwinds Persist; Shares Fail to Offer Much Value

While we intend to reassess the assumptions underlying our discounted cash flow model following no-moat Metro’s fourth-quarter results (which included a 2.5% increase in organic sales, 2.1% increase in food same-store sales, and 10 basis points of gross margin gains to 19.7%), we don’t expect a material change to our CAD 36 fair value estimate outside of a low- to mid-single-digit bump to account for additional cash generated since our last update.

We believe the Canadian grocery landscape is facing a number of challenges related to a heightened promotional environment as well as higher costs stemming from wage pressures, transportation, and fuel, none of which we expect to materially subside over the near term. As such, we don’t expect to alter our longer-term assumptions for 2% annual sales growth on average over the decade and generally flat operating margins (holding around 6%) by the end of the next 10 years. When taking into account the mid-single-digit appreciation following the firm’s results, we view the shares, which trade at more than a 20% premium to our valuation, as unattractive.

Management’s comments suggest the recently completed Jean Coutu acquisition is proceeding as planned, with pharmaceutical same-store sales up 1.8% in the quarter. We’ve long held that the deal enhances Metro’s scale and increases its exposure to health and wellness trends that may aid traffic throughout its network. Further, we think there could be an opportunity to cross-sell products into these new stores. However, several of Canada’s provincial governments have extended their control and have cut generic drug prices relative to branded fare in 2018, which stands to constrain profitability of the combined organization.