Taking stock: Loblaw Companies Ltd

Is the grocery play overdone? We take a look at one of Canada's heavyweight consumer staples

Taking stock: Loblaw Companies Ltd

One swallow does not make a summer, of course, but a single stock can often tell a wider story.

In this regular series, we turn the lens on one stock that is making moves. Maybe its price has soared or maybe it’s plummeted? Maybe it’s a canny play in certain economic conditions? We’ll provide a snapshot analysis and invite you, the reader, to share your thoughts in the comment section below.

What’s the story?

Stock: Loblaw Companies Ltd (TSE:L)

Inflation may not be as rampant as it was a few months ago but it remains elevated; latest CPI figures puts it at 6.3% year over year for December. As a result, in part, the performance of consumer staples - companies that provide goods and services that people use daily, like food, clothing, or other personal products - have lagged somewhat in 2023 so far after a rip-roaring 2022.

However, firms like Loblaw Companies, which also surged 50% in 2021, are coming off a hot streak. It reported third quarter net earnings attributable to shareholders of $556 million, an increase of $125 million or 29% year on year, while diluted earnings per share were $1.69, an increase of 42 cents, or 33.1%. It also posted a decent share price increase of 15.5% in 2022. A combination of high inflation and the company’s commitment to price freezes has put the company on the front foot, while the whole sector benefited from a return of higher foot traffic post-pandemic.

While these effects have faded, we all need sustenance and money, for many, is tight. Eating out, for example, is not as tempting when prices have skyrocketed. A recession is seen as likely and many investors are looking for defensive safe havens. Consumer staples are renowned for their resilience in both boom and bust.

The question is, with a well-telegraphed recession and inflation cooling, has Loblaw hit a peak? Will high pricing, which it benefited from during peak inflation, have to be reined in as consumers tighten their belts and inflation eases? Maybe, but we suggest inflation is sticky and the economic road ahead far from smooth. Public and political pressure may reduce already thin profit margins but a proven, well-run grocery play like Loblaw Companies could retain its inflation-hedge allure for some time yet. Heck, we all have to eat!

Price moves

From Jan 23, 2022, to Jan 23, 2023 the stock is up 26.6%

From Jan 23, 2018 to Jan 23, 2023 the stock is up 100%

Price as of January 23, 2023: CAD$118.15

Buy, sell, watch or hold? Hold, for now. Tell us your verdict below.