Metro (TSE: MRU)

Metro (TSE: MRU) is one of the largest grocery retailers in Canada and, following its 2018 acquisition of the Jean Coutu Group, also boasts a meaningful drugstore footprint.

Noteworthy grocery banners include Metro, Metro Plus, Super C, and Food Basics, while its pharmacies primarily operate under the Jean Coutu and Brunet trademarks.

Metro’s business is well-positioned to see growth in the current macroeconomic environment. However, the stock price may already reflect that potential.

Metro’s Growth Catalysts

As a provider of food and medicine, Metro is an essential business. Therefore, as inflation remains high and consumers are forced to spend more on essentials, Metro’s operations will remain minimally impacted. Indeed, it may benefit if consumers begin cutting back on restaurants in order to save money.

Furthermore, Metro is a relatively small player compared to industry titans Loblaw (TSE: L) and Walmart (WMT), as it only operates in Ontario and Quebec. Nevertheless, an argument can be made that the company is using its relatively-limited resources to ensure it can compete effectively.

However, if the company did choose to expand across Canada, it would have much more runway for growth compared to others.

Metro is Trading Near Fair Value

To value Metro, I will use a single-stage DCF model because its free cash flows are sporadic and not easy to predict. For the terminal growth rate, I will use the 30-year Government of Canada yield as a proxy for expected long-term GDP growth.

My calculation is as follows:

Fair Value = Average FCF per share / (Discount Rate – Terminal Growth)

C$70.03 = C$2.71 / (0.07 – 0.0313)

As a result, I estimate that the fair value of Metro is approximately C$70.03 under current market conditions. With the stock price trading at around C$69.10 per share, I believe there isn’t a large enough margin of safety to consider buying the stock.

Analyst Recommendations

Metro has a Moderate Buy consensus rating based on two Buys and five Holds assigned in the past three months. The average Metro price target of C$74.29 implies 7.8% upside potential.

Final Thoughts

Metro is an essential business that will likely benefit from rising inflation costs or, at the very least, be impacted less than other industries. However, the valuation suggests that the stock is already trading at fair value. Therefore, the upside potential may be limited.