Reposted from Seeking Alpha
By Brian Langis
Note: Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.1839 Price of 1 USD in CAD
This is my third article on Group Jean-Coutu (OTCPK:JCOUF) (PJC.A on Toronto exchange). Take note that I will be referring to Group Jean-Coutu by its main sticker, PJC, the one that trades on the TSX. On October 24, 2013, I recommended buying PJC at $18.40. The original article, Group Jean Coutu – An Opportunity For The Patient Investor, lays out my investment thesis. A year later, in Group Jean Coutu: An Update, I reviewed my position a year after a 42.2% gain, including dividends. I stated that I couldn’t give you a reason for PJC to deliver another 40% and that I believed PJC traded in the upper range of its valuation band. Well just about 70 days later PJC still managed to gain 12.3% to reach a 52-week high of $28.95 on January 5, 2015. That was until Q3 results were released on Thursday January 8, 2015. It appears that there’s currently a correction in motion the shares closed Wednesday at $27.38, prior to the earnings announcement. When I started writing this article earlier this week PJC was trading near $28. At the moment of writing these lines the stock is down to approximately ~$25. So a portion of the readers are probably also wondering “what’s going on?” The results missed analysts’ estimates and the stock has been falling from its high.
The objective of this article is to provide you with an update on PJC and its valuation. The high share price of PJC forced me to review its valuation and my position, and as a result I exited my position in PJC earlier this week. A capital gain is nice but now I have the tax consequence to deal with. I couldn’t figure out any tangible explanation for the exploding rise the share price since the fall. There hasn’t been meaningful news to justify such a rapid rise in its price. There’s always speculation of a takeover (maybe by Metro Inc.) but that rumor has been circulating for years. That’s the market for you. Sometimes higher prices is the reason for higher prices.
In 2014 PJC delivered a solid 53.7% gain. Apart from respectable financial results, the gain is probably the result from investors exiting energy stocks seeking refuge. I can see PJC being a refuge value during times of high volatility. It’s a great brand with an excellent balance sheet. Management is conservative, the company is profitable and stable, reliable dividend payer, and pharmacies are essentials. Basically, boom or recession, PJC is not going away. Group Jean-Coutu is also the only pure play pharmacy stock left in Canada after the acquisition of Shoppers Drug Mart by Loblaws. So if you want to buy a pharmacy in Canada, you have to buy PJC. Otherwise you have to buy supermarket Metro Inc. (MTRAF) which owns Brunet pharmacies or Loblaws.
Below is the table of PJC’s 2014 returns:
iShares S&P/TSX Capped Consumer Staples Index ETF (XST): 45.16%
S&P/TSX Composite: 7.42%
If you held the Canadian version of Jean-Coutu, you have been very well rewarded by crushing the S&P/TSX by 46.36%. PJC also crushed my initial valuation target. If you held the American version, JCOUF, unfortunately your good returns were penalized by the 9.41% drop of the Canadian dollar in 2014. PJC also did better than its main benchmark index, the TSX Capped Consumer Staples Index. The returns above do not include dividends. PJC has a dividend yield of about ~1.4%.