Written by Amy Legate-Wolfe at The Motley Fool Canada
The major Canadian grocery chains came out with their earnings this week. Among them, investors have reason to consider Metro (TSX:MRU) and Loblaw Companies (TSX:L) grocery stocks. That’s especially as interest rates and inflation could lead to more sales for Metro and Loblaw stock, with some leaning towards them over low-cost retailers.
But which is the better buy? Today, we’ll look at both Metro stock and Loblaw stock, and see what analysts believe the future holds for the grocery chains.
Metro stock dropped about 7% after earnings this week, when the Chief Executive Officer Eric La Flèche stated that the company would experience a “transition year” in 2024. “Significant headwinds” remain for Metro stock, including supply-chain improvements and automated distribution centres.
Due to this temporary transition, this year should see earnings per share remain flat, or even fall by $0.10 per share. Even so, analysts believe the market overreacted, with fourth-quarter 2024 results seen as satisfactory, especially given market conditions. Earnings per share hit $0.99, after adjusting for the labour dispute. Same-store food growth increased by 7%, which beat out estimates.
Therefore, Metro stock could be a great winner for those seeking it as a long-term hold. Right now, shares are down, but the company is stable and predictable, in the words of analysts. It has a track record of delivery, even through economic uncertainty. So even with 2024 and 2025 earnings per share being lower than hoped for, the company should continue to “sector perform.”
Yet again, if you’re hoping for major gains this year, you may be disappointed. It certainly is a hold for now if you own it, but long-term there is a big opportunity. Management is merely remaining cautious for full-year 2024. High costs will weigh it down for now, but investment will be key for the company’s future growth. In fact, it should continue its track record of between 8% and 10% in earnings per share growth.
Meanwhile, Loblaw stock has also been receiving some fairly negative attention. But perhaps not because of earnings. The company delivered a solid third quarter, with continued growth of 8% to 10% earnings per share for the foreseeable future, as with Metro stock. Loblaw stock focused on predictable performance during the latest quarter, and achieved that.
Loblaw stock reported revenue of $18.6 billion in the third quarter, a 5% increase year over year. This exceeded estimates as well. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were also up by 4.3% year over year, reaching $1.9 billion. This just narrowly missed some analyst estimates. Meanwhile, earnings per share jumped 12.3%, but still missed some estimates.
Loblaw stock, therefore, is enjoying fairly strong momentum even though the company remains tight for cash, and under pressure from elevated food prices. Accordingly, analysts made slight reductions for earnings through fiscal 2025, but still believe the stock could outperform.
That being said, No Frills employees may go on strike very soon, with 17 locations in Ontario stating they’ll be on the picket line. Should this occur, the company could very well go through a difficult quarter, and that could shrink future performance even further.
So, which is the better buy? At this stage, it looks like there is predictability with both of these stocks. Further, both are down from 52-week highs, providing a great time to jump in. Plus, you can look forward to long-term cash flow, and dividends to boot.
However, if you’re a conservative investor, I would go with Metro stock at this point. Management remains conservative for good reason, whereas Loblaw stock seems to ignore some signs that could see growth shrink in the near future.
Therefore, at this stage, if you’re a long-term investor looking for growth, I would consider Metro stock today.
Before you consider Loblaw Companies, you'll want to hear this.
Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in November 2023... and Loblaw Companies wasn't on the list.
The online investing service they've run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 24 percentage points. And right now, they think there are 5 stocks that are better buys.
See the 5 Stocks * Returns as of 11/14/23