How Metro Inc. plans to use cannabis to reward investors

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Licences for medical and recreational marijuana are potential revenue streams for this Canadian grocery chain that also owns pharmacies. And meanwhile, it’s already selling hemp-based foods and nutritional supplements


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METRO INC. $57.63 (Toronto symbol MRU; Shares outstanding: 255.2 million; Market cap: $14.7 billion; operates 600 grocery stores and 650 drugstores, in Quebec and Ontario.

On May 11, 2018, the company completed its acquisition of Jean Coutu Group. It operates 418 franchised drugstores in Quebec, New Brunswick and Ontario. Metro paid $4.5 billion (75% in cash, 25% in shares).

Metro has not yet applied for a licence to distribute medical cannabis through its drugstores as it’s waiting for more clarity regarding the new rules.

It’s also interested in eventually selling recreational cannabis. However, only its Ontario stores would be able to participate as the Quebec and New Brunswick governments have banned private retail cannabis stores.

In addition, Metro continues to sell foods and nutritional supplements made by Edmonton-based Hempco Food and Fiber Inc. (Note—Aurora Cannabis Inc. recently acquired Hempco).

Those products contain hemp extracted from cannabis. It has lower concentrations of the psychoactive compound THC and higher concentrations of cannabidiol (CBD) that help offset the psychoactive effects.

The Hempco acquisition should help Aurora with its plan to increase production of CBD-infused health products. It’s possible that Metro’s drugstores could become major distributors of those products.

Meantime, if you exclude unusual items, Metro earned $155.1 million in its fiscal 2019 third quarter, ended July 6, 2019. That’s up 25.6% from $183.4 million a year earlier. Due to additional shares outstanding, earnings per share rose at a slower rate of 20.0%, to $0.90 from $0.75. Overall sales rose 12.8%, to $5.23 billion from $4.64 billion. If you disregard Jean Coutu, sales gained 2.3%.

Same-store sales at the food stores rose 3.1%. Higher prices accounted for about 80% of that gain. Same-store sales at the pharmacies rose 3.4%. That reflects a 2.9% gain in sales of prescription drugs, and 4.3% higher sales of other merchandise.

Metro continues to close stores and renovate others in the wake of the Jean Coutu acquisition. So far, those actions have cut its annual expenses by $61 million.

Although it borrowed most of the cash it needed for the Jean Coutu acquisition, Metro’s long-term debt of $2.6 billion (as of July 6, 2019) is a moderate 17% of its market cap. The company also holds cash of $263.3 million.

The stock trades at a reasonable 20.2 times the projected fiscal 2019 earnings of $2.85 a share. With the June 2019 payment, Metro raised its quarterly dividend by 11.1%. The new annual rate of $0.80 yields 1.4%.

Metro is a buy.


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