Metro (TSE:MRU) stock has finally been pulling back recently, now over 8% from its all-time high. While this may not seem like a big pullback compared to the many stocks that got crushed last year, it’s a noticeable drop for such a stable Canadian grocery/drugstore company. In a previous article, we noted that MRU stock didn’t present much upside potential since it was near its all-time high and was a bit overpriced. However, Metro stock looks fairly priced now and could moderately reward investors in the long term, but we remain neutral because we don’t see an eye-catching opportunity.
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Nevertheless, following the drop and a fresh earnings report, the stock is worth revisiting.
Metro is Unphased by the Worsening Economy
Last week, Metro reported its Fiscal Q1-2023 earnings results, with numbers that beat estimates. Its sales grew by 8.2% to C$4.67 billion, while its adjusted diluted earnings per share grew by 13.6% to $1.00. Also, the company’s gross margin remained relatively stable, falling only 30 basis points year-over-year to 19.6% due to higher costs. Overall, it seems like Metro is easily navigating inflation.
Additionally, the company raised its dividend by 10% — now yielding 1.5% — which suggests that management is confident in the company’s future.
Metro Stock Looks Fairly Valued Now
Following Metro’s recent fall, the stock now looks fairly valued. Proving this assumption is its forward price-to-sales multiple of 0.84x, which is near its five-year average of 0.81x. Moreover, its forward EV/EBITDA multiple sits at 10.6x compared to its five-year average of 10.9x.
Additionally, Metro has a forward earnings multiple of 17.2x, implying a 5.8% earnings yield. In our opinion, this is a fair earnings yield when considering that its earnings are expected to grow by mid-single digits for the foreseeable future and considering the stable/safe nature of its business. A stable business should generally require less of a yield to attract investors because they are taking on less risk.
Is Metro a Good Stock to Buy, According to Analysts?
According to analysts, Metro stock comes in as a Hold based on one Buy and seven Holds assigned in the past three months. The average MRU stock price target of C$82.27 implies 14.1% upside potential.
The Takeaway
While Metro stock has come down a bit, its valuation still doesn’t leave a high amount of upside potential for investors that are looking for high returns. Nonetheless, for risk-averse investors, the stock can provide moderate gains from here in the long term, as Metro is an established grocer in Canada, and grocery demand is essentially unaffected by recessions.
