Expanding E-Commerce And Local Products Will Shape Future Success

Key Takeaways

• Growth in online and local product sales could enhance future revenue, driven by e-commerce expansion and consumer preference for Canadian products.
  
• Investments in supply chain efficiency and pharmacy growth may boost net margins and earnings, while share repurchases enhance EPS and stock price support.
  
• Economic volatility, tariffs, and inflationary pressures could increase costs, impacting Metro's margins, while competition and online sales growth affect pricing and profitability.

Catalysts

Through its subsidiaries, operates as a retailer, franchisor, distributor, and manufacturer in the food and pharmaceutical sectors in Canada.

• Metro is experiencing significant growth in online sales, driven by the expansion of click-and-collect services and third-party marketplaces, which could impact future revenue positively by tapping into the growing e-commerce grocery market.
  
• Metro's strategy of emphasizing local and Canadian products is resonating well with consumers, leading to sales of these products outpacing overall sales, potentially boosting future revenue and market share.
  
• Sustained investments in the supply chain, such as automation technology in pharmaceuticals and fresh distribution center expansions, are expected to improve operational efficiency and could positively impact net margins and earnings.
  
• The pharmacy division is experiencing robust growth, driven by specialty medications and professional services, which is likely to enhance the overall company's revenue and profitability due to the higher margins in pharmaceuticals.
  
• Metro's ongoing share repurchase program under its normal course issuer bid, having already repurchased 2.849 million shares, is likely to boost earnings per share and provide support to the stock price.

Metro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Metro's revenue will grow by 3.2% annually over the next 3 years.
• Analysts are assuming Metro's profit margins will remain the same at 4.6% over the next 3 years.
• Analysts expect earnings to reach CA$1.1 billion (and earnings per share of CA$5.29) by about May 2028, up from CA$993.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CA$1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.7x on those 2028 earnings, down from 22.8x today. This future PE is lower than the current PE for the CA Consumer Retailing industry at 22.8x.
• Analysts expect the number of shares outstanding to decline by 2.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.13%, as per the Simply Wall St company report.

Metro Future Earnings Per Share Growth

Risks

• The uncertain economic environment, including volatility and tariffs, could impact consumer sentiment and affect overall business performance, potentially impacting revenues and earnings.
  
• Although Metro has experienced solid revenue growth, there are inflationary pressures from commodity prices and a weaker Canadian dollar that could increase costs and impact net margins.
  
• The growth in online grocery sales, while positive, is currently dilutive to overall margin percentages, which could affect Metro's profitability if the trend continues without further cost optimization.
  
• There may be potential supply chain risks due to recently introduced tariffs and counter-tariffs, which could impact product sourcing and costs, ultimately affecting gross margins.
  
• The competitive environment, with an emphasis on discount sales and loyalty programs, may increase pressure on pricing and promotional investments, potentially impacting Metro's net earnings.

Valuation

• The analysts have a consensus price target of CA$103.091 for Metro based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$112.0, and the most bearish reporting a price target of just CA$77.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$23.8 billion, earnings will come to CA$1.1 billion, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 6.1%.
• Given the current share price of CA$103.15, the analyst price target of CA$103.09 is 0.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.