What are we looking for?
In the last week we learned CPI in the United States is up 2.9 per cent, PPI 2.2 per cent, retail sales 1.7 per cent (all annualized figures) and weekly jobless claims have been coming in lower than expected. The jury is still out on a slowdown or recession but these numbers certainly speak to a soft landing. If they forecast a pending recession, money managers will shift to more defensive names to protect capital and generate dividends, driving up the price of those stocks. With that, let’s look at valuations and dividends for our 10 largest consumer defensive stocks – those stocks that provide stable earnings and returns even during economic downturns.
The screen
We used StockCalc’s screener to select the top 10 listed consumer defensive stocks by market capitalization on the TSX. We then used StockCalc’s valuation tools to calculate the fundamental, or intrinsic, valuation for each stock to see if it is undervalued or overvalued compared with its price.
We screened for the following metrics:
- Discounted cash flow (DCF value) is a valuation technique in which cash-flow projections are discounted back to the present to calculate value per share;
- A price comparables (also known as price comps) technique values the company on the basis of ratios from selected comparable companies;
- An adjusted book value (ABV) is calculated by multiplying book value per share by its 10-year average price-to-book ratio.
- If we have analyst coverage, we look at the consensus target price.
More about StockCalc
StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to StockCalc using the promo code “Globe30”, which offers a 30-day free trial and special pricing for the second month.
What we found
This sector comprises companies that are engaged in packaged foods, grocery stores and beverages. The sector also includes discount stores, household and personal products and education services. The names on the list are ones we are very familiar with. Unlike other industries we have run in the past, most valuations are close to current prices for these stocks. What is interesting is we see analyst targets are slightly above our valuations, which may imply analysts feel more investor funds will move to these names if or as a recession develops, driving up their prices. Five of these stocks are actually up more than 40 per cent on a one-year basis, implying either they were significantly undervalued one year ago or they have moved up on the basis of recession fears. All stocks on this list are dividend-payers as well.
Let’s look at a few of these companies:
Loblaw Cos. Inc. L-T is one of Canada’s largest grocery, pharmacy, and general merchandise retailers. Our models are both above and below recent close price with our weighted average valuation slightly above current price. Given our demand for food and pharmaceuticals does not change, but that consumption patterns can shift, Loblaw is considered a go-to holding during recessionary times. Its stock price is up 50 per cent in the past 12 months compared with the broader S&P/TSX 60, which is up 16 per cent during that time.
The North West Co. Inc. NWC-T, through its subsidiaries, is a leading retailer of food and everyday products and services in Canada, Alaska, the South Pacific and the Caribbean. North West operates 228 stores under the trading names Northern, NorthMart, Giant Tiger, Alaska Commercial Company, Cost-U-Less and RiteWay Food Markets. On a same-store basis their most recent quarterly sales were up 3.8 per cent compared with the same quarter a year ago in part by being able to pass through vendor cost inflation. Our models and analyst consensus show similar values with the stock price close to our overall valuation. NWC-T pays a 3.5-per-cent dividend.
You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The “StockCalc Valuation” column is a weighted calculation derived from the models and Analyst target data if used.
Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.