Hot Stock: Shoppers Drug Mart

Cosmetic, grocery, drug sales up.

For the last couple of years, investors have been worried about Shoppers Drug Mart, Canada’s largest pharmacy chain. Provincial governments have capped the amount of money drug stores can charge for generic medications and that’s caused many analysts and investors to wonder about the company’s future revenues.

So far, though, the company has been able to weather this storm and then some. On April 25 it announced its first quarter results and revealed that while the average prescription value did decline by 4.8%—in large part due to those lower generic drug prices—its “front of store” sales, which include cosmetics and groceries, were up 4.2%. Pharmacy sales also increased by 3.3%. Overall, net earnings rose to $119.4 million, or 5.4% over the same period last year.

These positive numbers have led Kenric Tyghe, an analyst at Raymond James, to reiterate his outperform rating and $48 target price on the stock; it’s trading at $45 today.

While prescription values are down, he said in the April 26 report, the company has done a good job offsetting the regulatory headwinds. He’s bullish on the company’s cosmetic business, which did better than he expected it too and, he notes, the company continues to expand. In Q1 it completed six major drug store expansions and acquired five new stores.

Daniel Dupont, a fund manager with Fidelity Investments, also likes Shoppers’ future because it should be one of the big beneficiaries the aging demographic trend. The older people get, the more drugs they’ll need and the more money Shoppers will make, he says.

While it’s still early to tell just how these new regulations will impact the company, and whether other regulations will follow, this slow and steady earner—Dupont thinks it can grow earnings in the high single or low double digits—may not be as doomed as some people think. Tyghe points out that with good cosmetics growth and what seems to be an effective promotional strategy, Shoppers is “further insulat(ed) from the vagaries of heightened competitive intensity,” he says. It’s 2.53% yield is also a plus.