Analysts Say Jean Coutu Is Undervalued; Good Buying Opportunity

by: FP Trading Desk

Analysts see drug store chain Jean Coutu Group Inc. (OTCPK:JCOUF) as undervalued and a good buying opportunity despite achieving slightly lower than forecast earnings in the first quarter.

In a note to clients, Desjardins Securities analyst Keith Howlett wrote:

While Jean Coutu has been straining to improve its profits, the overall franchised store system is doing pretty well. The shares are inexpensive. We recommend purchase.

He maintained his “buy” rating on the shares but reduced his target price to C$12 from C$13.

UBS Securities Analyst Vishal Shreedhar said Jean Coutu achieved satisfactory results in a challenging economic climate. While same-store sales growth declined on a year-over-year basis due to legislated price reductions on prescriptions, an increased percentage of generic drugs and competition in non-drug retail items, “Jean Coutu’s results are still among the strongest in North America,” he said in a note to clients.

Jean Coutu trades at a good valuation of 8.4 times forward enterprise value to EBITDA, he added – a 26% discount to that of rival Shoppers Drug Mart Corp. (OTCPK:SHDMF).

While some investors are concerned about the retailer’s 29.8% equity stake in the U.S. chain Rite Aid Corp. (NYSE:RAD), the anlayst believes the risk is priced into the shares. He therefore maintained his “buy” rating but reduced his price target to C$10 from C$12.50.

RBC Capital Markets analyst Irene Nattel maintained her “outperform” rating on the shares and price target of C$12, noting front-end and prescription sales at stores open for more than a year were in line with broader forecasts and consistent with industry trends. She also believes the retailer’s core business warrants a higher valuation than the market is giving it credit for.

She notes investors are currently valuing the company’s shares at C$6.76, not including the stake in Rite Aid, while she estimates fair value of Jean Coutu at C$10.

In a note to clients, she wrote:

At current share prices, investors are paying a discount to fair value for the Canadian operations and getting the Rite Aid stake for free.

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