The Source
Paul Gardner, partner and portfolio manager, Avenue Investment Management Inc.
The Idea
Buy shares of George Weston Ltd.
Given how much stocks and bonds have rallied from their recent lows - 40 to 50 per cent in some cases - good buys are difficult to find, Mr. Gardner says.
"You have to hope the economy comes out of recession because that's what the markets are pricing in."
An ideal investment candidate would be a company with a strong balance sheet, trading at an attractive price that has the ability to grow. "That's where Weston comes in," he says. At just shy of $57 a share and yielding 2.6 per cent, "it's a value trade," he says. Weston shares changed hands in the $80 range as recently as 2007.
Weston's main asset is the grocery retailer, Loblaw Cos. Ltd., which accounts for about $44 of Weston's $57 share price, he estimates. Weston has $10 a share in cash, largely from the sale of its U.S. bakery business. Add about $2 a share for the real estate under Loblaws stores and, "you're getting what's left, the bakery business in Canada, for next to nothing." That business earned $1.50 of Weston's earnings before interest, taxes, depreciation and amortization (EBITDA) last year.
Loblaw, at about $33, is also looking cheap, Mr. Gardner figures. After subtracting the value of the company's real estate, which accounts for about $25 of a Loblaw share, "in a way you're getting Loblaw for next to nothing" too, he says. Loblaw shares have been held back over the past few years because of management and supply chain problems - issues Mr. Gardner thinks have been largely resolved. This year, the shares have been lifted along with the market but are still well below their historic highs.
"They've worked on the supply chain and warehousing problems, renovated stores and initiated real change on the operational side," he notes. The company's second-quarter earnings "surprised on the upside," although it warned of a difficult second half.
Loblaw is also expanding into the ethnic food market, announcing the purchase of the T&T Supermarket chain, with 17 stores, in July. (Loblaw also owns Zehrs, Fortinos and Real Canadian Superstores.) T&T's big takeout Chinese food business "gives them some higher margins."
The Payoff
A potential double-digit capital gain in a relatively short time if the economy recovers, price cutting abates, and Loblaw and George Weston shares come to be looked on more favourably by the market, Mr. Gardner says. What would a more "normal valuation" for Weston be?
"I don't like to put a number on it, but you could see a 30-per-cent return over the next year and a half."
The Big Risk
Fierce price cutting among grocery retailers squeezes profits more than expected at Loblaw as the economy struggles, leading to a long stretch of disappointing earnings and depressing the share price of both Loblaw and its parent, Weston.
Why Listen to Paul
Gardner?
Mr. Gardner has more than 20 years' experience in the investment business, much of it on the fixed-income side.
Avenue Investment Management is an independent investment counsellor and portfolio manager for individuals with $500,000 or more to invest.
© The Globe and Mail
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