SC: Shoppers Drug Mart

September 1st, 2009 by Potato

It’s been a while since I spewed my incoherent thoughts out about a potential investment, and that’s due in no small part to the fact that a) most of my readers don’t want to read through these boring things, and b) I’ve been embarrassingly wrong in a number of cases: Priszm turned quite badly against me, and I’ve been kicking myself for going to all the trouble of trying to put a value on POT and AGU, only to see the price go to that level just days after the post, and yet I didn’t buy any due to fear.

For the last few months I haven’t bought anything other than a few little incremental savings into TD’s e-series index funds: we did have two vacations this summer and some car repairs. I still don’t have much money to invest, but I’m thinking of selling some other stocks that have rallied lately (esp. my bank stocks) since I think they might have run their course… but I don’t have anything else waiting to put the cash in!

One company that I’ve seen others recommend is Shoppers Drug Mart (SC).

From the consumer’s side, I’ve liked Shoppers: their stores are usually well stocked, their store brand items are good alternatives, and the stores themselves are often conveniently located with good hours, clean and well-lit. They have their own well-liked rewards card program, and many of their sales are little more than bonus optimum points (they don’t have to do hard discounting to get people in the door). For a long time I considered them a fantastic convenience store: open late, yet with good prices on stuff like snacks and over-the-counter drugs. It’s been a long time since I’ve considered them as a drug store, since their pharmacy counter charges an arm and a leg to fill a prescription (and indeed, anecdotally I’ve noticed that they don’t have much traffic to the pharmacy). Their beauty counter is over-priced, but does great business anyway, I suppose it is high-quality. However in the last year or so I’ve been disappointed by the convenience store side of shoppers, as their non-sale prices on a lot of items has gone up 25+%, so I’ve been shopping there less often for fewer things (basically now I only go if there’s a big sale/bonus points day).

Pretty much every report/analysis I’ve seen rates them a buy, and that’s largely on the basis of their growth. However, I’ve looked briefly a few times and haven’t been wooed: a fair bit of growth is already priced in with a 16X PE, and that’s at it’s current near-low (Shoppers is one of the few stocks to not enjoy a big rally this year). On the surface, it always looked to me like one of those stocks that runs along great until they hit the slightest bump in the road and “correct” hard. Their same store sales growth has been an impressive 5-7% for each of the last several years; on top of the growth in existing stores they’ve been opening new stores to the tune of 5-10% per year — that’s a lot of growth, about 15% per year to the bottom line. However, I have a bit of a personal issue with projecting exponential growth out too far into the future: at some point, that kind of growth has to slow down, and I don’t like holding a stock when “multiple contraction” sets in — as great as a company might be at that point, holding the shares might be painful.

One worrying sign is that all the insider activity over the last few months has been to sell. It’s not a huge portion of the float, only about 0.1% of the outstanding shares have been sold, but it is a little worrying that the insiders don’t want to own SC. Also, I was surprised to see that nearly half their revenue came from the pharmacy side of the business; as a customer I don’t like it — if consumers look to cut expenses they might find numerous other pharmacies that are cheaper to fill their scripts, like I did — and as an investor I’m a little cautious since the pharmacy side is subject to “political risk”.

When it all boils down, Shoppers does seem to be a well-run business, and their rewards program is staying good, which keeps people loyal. It also helps that it’s the only rewards program I know of that gets the cult-like atmosphere going with “exclusive” bonus points days and refer-a-friend programs. I don’t like the P/E over 15, especially in this environment, so I’m going to sit on the sidelines and just watch until the price gets down to $39 or so; maybe it never will, and I’ll be making the mistake of avoiding a paying a good price for a great company in favour of seeking a great price on something that isn’t so great. It wouldn’t be the first time. However, I’ll try to avoid repeating my AGU mistake, and now that I’ve set a price that I think is a good value, I think I will actually buy if it hits that, unless something material comes out (such as new legislation).

On a completely different note, Wayfare was curious as to how I was doing with the active management side of my portfolio, and indeed it’s been a while since I checked myself. Looking back to January, 2008 (a baseline date I selected since it’s about when I changed how I deal with my investments and also before the crisis really got going), the TSX is down 20% and the S&P500 is down 30%. I’m only down about 8% myself. That’s assuming that all contributions that have been made over the last year and a half or so were present at the beginning — buying in slowly during a down market would have given me a boost due to pure luck in market timing even if I had a passive portfolio. The contributions over that time aren’t insignificant: between putting my cash savings and new savings into the market (aside from a small emergency fund, I’m 100% equities now) they’re nearly 70% of my starting portfolio value. I created a Google Finance portfolio with just XIC in it to mimic what would have happened if I had spread out the contributions evenly over the 20 months: this is about the best-case scenario for passive investing, since I actually put the bulk of the cash into the market long before the bottom was in, and since the TSX did better than the S&P500. Nonetheless, I still (narrowly) beat it: the XIC portfolio is down ~9%, which is a better measure since it also includes dividends.


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