What are we looking for?
With a possible recession looming, many money managers have shifted to more defensive names to protect capital and generate dividends. Today we look at stocks that fall into the consumer defensive sector, and whether their valuations reflect a broader shift to safety.
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 fundamental (or intrinsic) valuation for each stock to see whether it is undervalued or overvalued compared with its price.
Overview of the techniques used:
- 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 (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 looked 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
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).
This sector comprises companies engaged in packaged foods, grocery stores and beverages. It also includes discount stores, household and personal products, and education services. Unlike other industries we have run in the past, most valuations here are close to the actual price for these stocks. Notably, analyst targets are somewhat above our valuations, which may imply analysts feel more funds will move to these names as a recession develops, driving up their prices. All stocks on this list are dividend payers as well.
Let’s look at a few of these companies:
Loblaw Cos. Ltd. is a leading grocery, pharmacy and general merchandise retailer. Our models are both above and below the recent closing price, with our weighted average valuation slightly below current price. Loblaw is generally considered a go-to holding during recessionary times. Its stock price is up 33 per cent in the past 12 months, compared with the S&P/TSX 60, of which Loblaw is a constituent, which is down 8 per cent during that time.
Premium Brands Holdings Corp. owns specialty food manufacturing and distribution businesses, with operations in Canada and the United States. The company has seen its stock price decline almost 27 per cent over the past 12 months even though revenue has grown by 25 per cent, and earnings by 53 per cent, over the same period. Two of our models, as well as analyst consensus, show the stock to be undervalued while our DCF model shows it’s still quite overvalued. It seems this stock’s price may have overshot during the reopening that followed pandemic restrictions, and subsequently undershot since markets began to turn negative last fall.
Dollarama Inc. is principally engaged in operating discount retail stores. Its stock is up 40 per cent over the past year and has continued to climb while most of the market is down this year. Our models show the stock as overvalued, but analyst consensus has a higher target – presumably with the expectation people will shift to lower cost items during a recession. Its price-to-earnings ratio (35, not shown) is approaching the heights it reached when it peaked in 2017 at 37 times earnings.
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.
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