Old news, but good news:
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nationalpost.com
Friday, February 04, 2000
Price is right among retailers' stocks
Zena Olijnyk
Financial Post
Canadian merchandising stocks were not the place to invest
in 1999, says Marilyn Brophy, an analyst with Scotia Capital
Markets. The sector suffered its worst performance in
nearly 30 years.
Still, there are some bright spots for those wanting to buy
shares of retailers in 2000, Ms. Brophy says in a recent
report. These include Canadian Tire Corp., Empire Group
(which owns grocer Sobeys Inc.), Sears Canada Inc. and
Hudson's Bay Co.
The sector underperformed in 1999, she says, despite
consolidation in the supermarket and department store
industries, buoyant consumer spending and attractive stock
valuations.
Ms. Brophy says the trend has continued into the new year,
with the Toronto Stock Exchange merchandising subindex
declining more than 9% compared with the year-ago period.
That contrasts with the TSE 300's gain of less than 1% in the
period.
Ms. Brophy says the merchandising stocks she follows are
trading at an average of 16 times forecast earnings for this
fiscal year. That's a 43% discount to the corresponding
multiple for the TSE 300.
Her 12-month target for the merchandising subindex is
5344, about a 15% upside from current levels. Scotia
Capital's target for the TSE 300 is 9000, a gain over today's
levels of around 8895.
A situation has developed, she says, whereby the gap
between the winners and losers continues to widen. But Ms.
Brophy has a number of "strong buy" and "buy"
recommendations for retailing stocks, with total expected
returns of between 26% and 71%.
In the non-food merchandising stocks, Sears Canada and
Forzani Group "continue to post sustained earnings gains"
while the performance of other retailers, such as Dylex
Ltd., Mark's Work Wearhouse and Boutiques San Francisco
"continues to be erratic."
Forzani (FGL/TSE), Canada's largest sporting goods
retailer, is estimated to earn 59¢ a share for the fiscal year
just ended and 75¢ for fiscal 2000. Her one-year target for
the stock is $6.40. Forzani closed down 5¢ at $4.20
yesterday.
She expects Sears' earnings to rise to $2.40 this year from
$1.88 last year, while her 12-month target price is $51 a
share. Sears (SCC/TSE) closed yesterday down 75¢ at
$39.25.
Ms. Brophy says Hudson's Bay (HBC/TSE) is likely to
report healthy fourth-quarter earnings for the year just
ended, helped by one of the strongest Christmas seasons in
years. The shares, which closed at $13.45 yesterday, off
45¢, are trading at a price-sales ratio whereby an investor
"can hypothetically purchase one dollar of revenue for about
14¢ a share." At these levels, rumours of a potential
takeover will likely resurface, she says.
Last summer, talk of a takeover sent the stock soaring over
$20. There has since been speculation that the company
might separate its Bay and Zellers units, spinning one or the
other off.
Ms. Brophy's one-year target price is $25 a share, with the
retailer expected to earn $1.04 a share for the year just
ended and $1.63 for this fiscal year. The share price
increase represents a return of 71% over current levels.
Canadian Tire (CTRa/TSE) closed yesterday at $26.60,
down 25¢. Ms. Brophy says one reason for this is that there
has been a large amount of index selling as a result of the
collapse of the TIP 35 and HIP 100 into the new S&P/TSE
60. There has also been some concern surrounding the
recent announcement Stephen Bachand, chief executive,
will retire this year.
Ms. Brophy estimates earnings of $2.65 this year, up from
$1.89 -- which included a $50-million specialc charge -- it
earned for the year just ended. Her price target is $39.
Sobeys (SBY/TSE) is expected to reap the benefits of its
acquisition of the Oshawa Group Inc., as well as savings
from upgrades to its distribution system in Ontario. Two
new food distribution centres are expected to generate
savings of $20 million, while the Oshawa takeover will lead
to $70-million. Ms. Brophy also notes that Sobeys will be
added to the TSE 300 in mid February.
Her target for Sobeys stock is $26. It closed yesterday at
$18.80, up 30¢. Sobeys parent company, Empire Co., is
trading at more than a 30% discount to its estimated pretax
"realizable" value of $43 a share. Her 12-month target is
$35.
Empire is in the midst of selling its investment in U.S.
grocer Hannaford Bros. Co. for $79 (US) a share in a cash
and stock transaction. When the sale is completed, Empire
will own 10% of Delhaize.
As a result of the Hannaford sale, Empire's pretax value rose
to more than $46 a share. Empire shares (EMPa/TSE)
closed yesterday at $28, up 50¢. |
