The S&P 500 was about flat today but Toronto was up 0.5% as it was boosted by the Loblaws / Shoppers Drugmart deal.
Most of our stock picks were up today but Toll Brothers fell 2.2% to $33.84. They don’t report earnings until around August 22. I expect a good report at that time.
It appears that Loblaws has bid about 20 times earnings for shoppers. And the market cheered this by pushing up Loblaws stock by 5.4%. The fact that companies are willing to pay 20 times earnings provides support for stock prices. Canadian Tire is trading at only 13 times earnings.
Much was made of the fact that the transaction will be immediately accretive to earnings for Loblaws. However adding to next year’s earnings per share is neither a necessary nor a sufficient condition to make this a wise investment for Loblaws. I have no idea if it is a wise investment for Loblaws. And knowing that it is accretive earnings does not educate me on that point. Loblaws can borrow money at low rates. Borrowing money at 4% and investing in something that earns 5% is accretive, but not necessarily wise. And it can issue shares, as it is doing in this purchase at 20 times earnings. If I can issue shares at 20 times earnings then any purchase under 20 times earnings is accretive. But 20 items earnings is still only a 5% earnings initially. Whether this works out for Loblaw investors comes down to how well Loblaws can manage the operation in the years ahead.