Postponing cannabis sales won’t hurt this stock’s growth prospects

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Cannabis-Connected

Last year, this stock acquired a large drugstore based in Quebec. While rival Shoppers Drug Mart is already licensed to sell medical cannabis, this drugstore chain has no immediate plans to do so. That’s because the Quebec government limits retail cannabis sales to its government-owned stores (part of the province’s monopoly liquor-store chain).

This stock has enjoyed steady growth in sales and earnings. Cannabis sales could spur added growth, but even without them we like the stock’s long-term potential.


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METRO INC. $46 (Toronto symbol MRU; Shares outstanding: 227.4 million; Market cap: $10.5 billion; www.metro.ca) 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 government has banned private retail cannabis stores.

Meantime, if you exclude costs related to the Jean Coutu acquisition and other unusual items, Metro earned $161.0 million in its fiscal 2018 fourth quarter, ended September 29, 2018. That’s up 22.8% from $131.1 million a year earlier. Due to the additional shares outstanding, earnings per share gained just 12.5%, to $0.63 from $0.56. That matched the consensus estimate.

Overall sales rose 15.7%, to $3.77 billion from $3.23 billion. The new Jean Coutu operations contributed $690.7 million to the latest total. If you disregard the new operations and an extra week in the year-earlier quarter, sales rose 2.5%.

Food same-store sales improved 2.1%. Higher prices accounted for about 40% of that gain. Same-store sales at the pharmacies rose 1.8%, reflecting a 0.7% increase in sales of prescription drugs and a 3.9% improvement in sales of other merchandise.

Metro ended the quarter with long-term debt of $2.6 billion, up from $1.4 billion on September 29, 2018. Even so, that’s still a reasonable 25% of the company’s $10.2 billion market cap. Metro also held cash of $226.9 million.

So far, eliminating overlapping operations has let Metro cut $17 million from its annual costs. It aims to increase those annual savings to $75 million by the end of fiscal 2021. The company also plans to offset higher minimum wages in Ontario by cutting back store hours and installing more self-checkout kiosks.

Those savings should increase the company’s full-year earnings, from $2.52 a share in fiscal 2018 to $2.90 in 2019. The stock trades at a moderate 15.9 times the 2019 estimate.

With the March 2018 payment, Metro raised its quarterly dividend by 10.8%. Investors now receive $0.18 a share instead of $0.1625. The new annual rate of $0.72 yields 1.6%.

Metro is a buy.

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