Analysts Applaud Shoppers Drug Mart's Strong 4Q Results

Shoppers Drug Mart Corp.'s (SHDMF.PK) strong fourth quarter results on Wednesday have turned analyst fears into cheers.

In a note to clients, RBC Capital analyst Irene Nattel said:

Shoppers ability to deliver strong and in-line results in a quarter when consumer retail organizations across North America are facing headwinds in the form of slowing consumer spending, increasing competitive activity and rising input costs demonstrate that this company's management does more than just show up in the morning and hope for the best.

She applauded the company's industry leading prescription performance, solid in-store results, its impressive margin expansion of 13.1% and also its 34% dividend increase to C$0.86 per share.

She also questioned "conventional wisdom" that Shoppers stock is too expensive, noting the company's multiple is trading below its own historical valuation band, and at the bottom of the range of its relative valuation.

She wrote:

In the current uncertain environment, a company like Shoppers Drug Mart with double-digit earnings growth, good earnings visibility, a clean balance sheet and rising dividend, arguably deserves such a valuation.

She maintained her "top pick" rating, and C$66 price target.

Desjardins analyst Keith Howlett was equally enthusiastic with Shoppers, upgrading the stock from "hold" to "buy" and increasing his price target from C$59 to C$60.

"With approximately one-half of its stores in Ontario, we had thought that Shoppers might suffer more from the intense promotional activity by supermarkets in 4Q," Mr. Howlett said, offering Loblaws' promotional offer of $10 off every $100 spent as an example.

But while these promotional activities appear to be successful in driving traffic from competitors, Mr. Howlett told clients that Shoppers' recent results confirm "convenience, selection and expertise still trump price" for many customers.