Growth Investors: Make 173% Gains With This 1 Stock!

Metro Inc is trading at a steep discount to intrinsic value. Add it to your TFSA or RRSP today!

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Metro (TSX:MRU) is a Canadian food and pharmacy retailer and distributor that operates a network of supermarkets, discount stores and drugstores. The company reports two business segments: food operations and pharmaceutical operations.

Metro reports a market capitalization of $13.81 billion with a 52-week low of $45.81 and a 52-week high of $59.03.

Intrinsic price

Based on my calculations using a discounted cash flow (DCF) valuation model, I determined that Metro has an intrinsic value of $148.51 per share.

Assuming less than average industry growth, the intrinsic value would be $147.21 per share and higher than average industry growth would result in an intrinsic value of $149.84 per share.

At the current share price of $54.36, I believe that Metro is substantially undervalued. Investors looking to add a grocery conglomerate to their RRSP or TFSA should consider buying shares of Metro.

Metro has an enterprise value of $40.4 billion, which represents the theoretical price a buyer would pay for all of Metro’s outstanding shares plus its debt.

One of the good things about Metro is its low leverage with debt at 16% of total capital versus equity at 84% of total capital.

Financial highlights

For the fiscal year ended September 28, 2019, the company reported a strong balance sheet with retained earnings of $4.2 billion, up from $3.9 billion at FYE 2018.

This is a very good sign for investors as it indicates the company has more years of cumulative net income than net loss which gets reinvested into the company to fuel growth.

Metro reports cash and equivalents of $273 million with $462 million in current liabilities. While company does not have enough cash on hand to cover its short-term debt obligations, my concerns are abated given the company’s $600 million unused revolving credit facility.

Overall sales are up materially from $14.4 billion in 2018 to $16.8 billion in 2019 (+16.6%), likely driven by its acquisition of Jean-Coutu.

In 2018, Metro disposed of its stake in Alimentation Couche-Tard for gains of $1.1 billion on the sale and pre-tax income of $2.1 billion. In absence of this divestiture, the company’s pre-tax income is $969 million in 2019.

From a cash flow perspective, senior management is fiscally responsible as indicated by its $54 million pay down in long-term debt ($995 million pay down in 2018). This is offset by draws on long-term debt of $47 million in 2019 and $2.2 billion in 2018.

The company also had a cash outflow of $3 billion in 2018 related to the Jean-Coutu acquisition. I believe that the Jean-Coutu acquisition will deliver substantial returns to Metro in the near future, as it allows the company to cross-sell its products, thereby reaching a larger audience.

Capital expenditure spending is up year over year at $357 million in 2019, compared to $286 million in 2018 (+24.7%). This is a good sign, as it indicates the company is investing in itself.

Foolish takeaway

Investors looking to buy shares of a grocery conglomerate should consider buying shares of Metro. The company reports positive retained earnings and increased revenues complemented by the acquisition of Jean-Coutu in 2018, which will undoubtedly drive growth for Metro in the coming years.

At its current share price of $54.36 and an intrinsic value of $148.51, I believe Metro has a 173% potential upside. RRSP and TFSA investors should consider adding it to their portfolio today!

Should you invest $1,000 in Metro right now?

Before you buy stock in Metro, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Metro wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $18,391.46!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 35 percentage points since 2013*.

See the Top Stocks * Returns as of 1/7/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chen Liu has no position in any of the stocks mentioned. The Motley Fool recommends ALIMENTATION COUCHE-TARD INC. Alimentation Couche-Tard is a recommendation of Stock Advisor Canada.

If You Thought Apple and Microsoft Were Big, You Need to Read This.

The steel industry produced the world's first $1 billion company in 1901, and it wasn't until 117 years later that technology giant Apple became the first-ever company to reach a $1 trillion valuation.

But what if I told you artificial intelligence (AI) is about to accelerate the pace of value creation? AI has the potential to produce several trillion-dollar companies in the future, and The Motley Fool is watching one very closely right now.

Don't fumble this potential wealth-building opportunity by navigating it alone. The Motley Fool has a proven track record of picking revolutionary growth stocks early, from Netflix to Amazon, so become a premium member today.

See the 'AI Supercycle' Stock

More on Investing

how to save money
Tech Stocks

The Smartest Growth Stock to Buy Right Away With $5,000

If you want a growth stock, you want a company that has a stable path forward. So, let's look into…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

TFSA: How to Turn the New $7,000 Contribution Into Monthly Passive Income

Wondering how to earn monthly passive income from your recent $7,000 TFSA contribution. Here are two stocks to consider adding…

Read more »

dividends grow over time
Dividend Stocks

These 3 Canadian Stocks Could Triple in 5 Years

These three Canadian stocks are in a prime position for future growth. But some patience may be needed along the…

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Metals and Mining Stocks

TFSA $7,000: Where to Invest That TFSA Contribution for Top Income

The TFSA is one of the best ways to invest, and this stock is a strong option to pick.

Read more »

woman analyze data
Dividend Stocks

Got $10,000? Invest in This Dividend Stock for $1,475.68 in Passive Income

If you have a windfall ready to invest, then this is one of the top choices for passive income.

Read more »

Muscles Drawn On Black board
Investing

3 Monster Stocks to Hold for the Next 3 Years

Here are three top monster TSX stocks long-term investors may want to consider right now.

Read more »

Canada day banner background design of flag
Investing

Top Canadian Stocks to Buy Right Now With $2,000

Despite the uncertain outlook, I am bullish on these four Canadian stocks due to their solid underlying businesses.

Read more »

Concept of multiple streams of income
Stocks for Beginners

How to Optimize Your Canadian Investments for the Year Ahead

Here's how you can improve the tax-efficiency of your investment portfolio for 2025.

Read more »