Shares in Shoppers Drug Mart look interesting as a value play. Indeed, say analysts, valuation metrics such as price-earning ratios(around 14) have never been this cheap since the shares were listed for trading.
Their bargain status first came to my attentionthanks to the Baskin Blog. The thesis was that the Ontario Governments attack on drug rebates has knocked the share price down but there is still rising demand over the longer run from aging Baby Boomers for drugs and health products.
As well, the provincial governments new rules should push many independent pharmacies (80% of revenues from prescriptions) out of the industry and leave behind customers for Shoppers to pick up. The latter has not only the financial depth to survive and but is hurt less by the government’s move on drug prices since 50% of its sales are from non-prescription products like paper towels, Kleenix, food, drinks and so forth.
In addition to the aging/consolidation trends, there is the trend toward convenience shopping. Shoppers continues to addnon-drug goods for sale in their stores, plus other conveniences such as postal outlets. Mr. Baskinis quoted on stockchase.com as saying: People under estimate how they make money in the front of the store. Theyre going to be a mini-supermarket.
Other analysts on stockchase.comcaution that shareholders may need to be patient. The health, consolidation and convenience trends are slow-moving, long-term factors. Some analysts also warn the stock may not yet have reached bottom: other provinces are likely to follow the Ontario governments lead ondrug prices, which could further lessen Shoppers Drug Mart’sfinancial performance in the short to medium term.