Metro Inc upgraded to buy, seen as ‘safe haven’

Metro Inc. boosted its capital program to roughly $300 million for fiscal 2015

Calling Metro Inc. a “safe haven” due to its consistent history of productive investment and returning excess capital to shareholders, Desjardins Capital Markets upgraded the grocer to purchase from hang on Thursday.

The Montreal-based food retailer on Wednesday reported a 19.4-per-cent grow in second-quarter earnings per share, as sales trends arrived better than anticipated.

Metro also boosted its capital program for fiscal 2015 to roughly $300 million, as it sees healthy returns coming from recent investments to renovate both its conventional Metro and discount Food Basics formats.

Desjardins analyst Keith Howlett also raised his price target around the stock to $37.50 from $36, on higher EPS estimates of $1.97 (from $1.94) for 2015 and $2.17 (from $2.12) in 2016.

“At the current time, grocery industry the weather is improving (sales and profitability are increasing) and Metro is upgrading its capital expenditure program,” he said in a research note. “We expect Metro to benefit from the fact that its two largest grocery competition is in the midst of digesting and integrating major acquisitions.”

Despite the optimism demonstrated by Metro’s share price gain of roughly 60 per cent? in the past year contributing to 12 percent so far in 2015, not everyone is convinced there is further upside.

David Hartley at Credit Suisse suggested the stock might be at an inflection point because of the company’s limited development in net income and free income. The analyst also noted that Metro’s share buybacks have become less effective in enhancing value at current prices.

“Metro requires a material catalyst to sustain the present valuation,” Hartley told clients.

The company has ample balance sheet capacity, particularly given the potential spin-out of its remaining stake in Alimentation Couche-Tard Inc. However, Metro’s management has established that an acquisition shouldn’t be anticipated anytime soon, and potential target Jean Coutu Group Inc. isn\’t for sale anyway.

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