The North West Company (NWC) The Fund @ Sprott Equity Research Buy, Current: $25.63, Target: $27.25 January 13, 2015 Nicholas Falardeau BCom Candidate 2017 Finance Equity Analyst [email protected]Kyle Stolys BCom Candidate 2017 Finance Sector Manager [email protected]Investment Thesis 5-Year Performance Source: Yahoo Finance Security of Capital 80% of revenue is generated through grocery sales. Same store sales have continuously grown at 2%. Has a beta of 0.27. The Government of Canada is dedicated to the economic prosperity of northern territories due to aboriginal habitation and territory claims against other nations. Owns and operates 230 stores. (180 are Canadian). It also provides a 4.5% dividend yield. Lack of competition Continuous same store growth and future expansion opportunities Fair price for earnings and assets Due to high barriers to entry, the majority of their stores are the dominant place for food, everyday merchandise and financial services. With the exception of some mom & pop stores, the company’s stores tend to have a monopoly on their communities. It has also established a loyal customer following through charitable donations in their communities. The company’s stores have been averaging a 2% growth rate. The company owns a franchising agreement to open up to 72 Giant Tigers; it currently operates 32. Lately the company’s focus has been on optimizing existing markets through store renovations, taking on new goods and services, and acquiring competing small stores. The company has a $1.24B market cap with $320M in CA (3.62 p/b) and a P/E ratio of 19. P/B ratios average 2.05 while P/E ratios average 26 within the company’s close competitors. Through this we can see that for our dollar we may gain more through earnings and less through assets than what can be achieved at Metro, Loblaw, and Sobeys. 0 0.5 1 1.5 2 2.5 $14 $16 $18 $20 $22 $24 $26 $28 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Price per Share Daily Volume Stock Price Current Target Price
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The North West Company (NWC)
The Fund @ Sprott Equity Research
Buy, Current: $25.63, Target: $27.25 January 13, 2015
80% of revenue is generated through grocery sales. Same store sales have continuously grown at 2%. Has a beta of 0.27. The Government of Canada is dedicated to the economic prosperity of northern territories due to aboriginal habitation and territory claims against other nations. Owns and operates 230 stores. (180 are Canadian). It also provides a 4.5% dividend yield.
Lack of competition
Continuous same store growth and future expansion opportunities
Fair price for earnings and assets
Due to high barriers to entry, the majority of their stores are the dominant place for food, everyday merchandise and financial services. With the exception of some mom & pop stores, the company’s stores tend to have a monopoly on their communities. It has also established a loyal customer following through charitable donations in their communities.
The company’s stores have been averaging a 2% growth rate. The company owns a franchising agreement to open up to 72 Giant Tigers; it currently operates 32. Lately the company’s focus has been on optimizing existing markets through store renovations, taking on new goods and services, and acquiring competing small stores.
The company has a $1.24B market cap with $320M in CA (3.62 p/b) and a P/E ratio of 19. P/B ratios average 2.05 while P/E ratios average 26 within the company’s close competitors. Through this we can see that for our dollar we may gain more through earnings and less through assets than what can be achieved at Metro, Loblaw, and Sobeys.
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Company Overview The North West Company (NWC) operates a chain of grocery stores across Northern Canada
and Alaska. They are branded Northern, AC Value Center, and Northmart, and are the main
and sometimes only access of food in their communities. Together they make up 159 of the
company’s operations. They span on average 7500 feet which is slightly bigger than the
average bulk barn. In addition to grocery stores, it operates 20 Quickstops convenience stores
and 32 Giant Tigers. It has a franchising agreement with Giant Tiger to open up to 72 stores.
65% of the company’s sales come from Canada. Alaska’s 30 Value Centers make up most of the
international sales with the rest being from 13 “Cost u Less” in the Caribbean.
As mentioned, The North West Company is in the grocery/retail industry. Its input costs are
greatly affected by the prices of food. The company’s geography is what sets it apart from the
industry, as its outlets are distant from its producers. Therefore it is also strongly impacted by
the price of gas due to extended transportation.
Economic prosperity where the company operates is dependent on government wealth
redistribution programs and mineral mining.
Sector Outlook Consumer Staples are goods that consumers will purchase no matter the economic conditions.
Thus, demand for these goods, relative to others, are generally inelastic and thus are
considered non-cyclical. Consumer confidence (figure 2) has the largest impact on the sector.
As consumers feel confident about their personal financial state, they are more willing to pay
for premium consumer staples goods. In bad times, although still required to purchase staples,
consumers tend to switch to discount items. Input prices can be tricky on the sector, as sudden
changes can lead to a temporary boost or decrease in profits due to the effect of sticky prices.
Figure 1: Revenue by Geographic Region
Source: Bloomberg, Student Estimates
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In the event of an economic recession or stagnation we expect consumer staples as a whole to
experience slight revenue drops. Some parts of the sector will drop significantly but the
majority will remain resilient since many consumers need to purchase them. On an industry
basis, grocery chains are part of the more resilient category as there is always a need to
purchase food for your home. Grocer revenues tend to not decrease in recessions (some even
increase due to restaurant spending being redirected to them). The North West Company’s
strategic positioning (being the only store in town) enhances its economic prosperity in tough
times, as there is definitely no substitution for their goods.
Industry Dynamics Due to the necessity of food for everyday life, the grocery industry’s cash flows tend to be very
stable (as seen in company revenues in figure 1). The grocer tactic for growth has been to
increase profit margins by selling premium items over discount items. This is not reliable
during bad times as consumers will switch back to discount brands. In recent years the push
for growth has come out of expanding grocer services. Pharmacies, ATMs, tech gadgets, gas,
and fast food are examples of this. The biggest has been financial services. Many grocers now
offer credit cards and other services that tender to a customer’s personal welfare. This places
its growth reliance in another industry entirely. Nevertheless the idea in the industry remains
the same, a store has a customer in its walls for 20 to 45 minutes and a grocer will attempt to
increase customer spending as much as possible.
Government intervention is a slight risk among northern businesses. A certain percentage of
enterprises in native communities must be owned by natives. The company bears this risk by
providing significant community donations and by making efforts to hire natives. Cost drivers
for grocers are employee turnover, crude prices, and food prices (seen in figures 3 and 4).
There is also a high barrier to entry in the industry as it is capital intensive. Although
convenience stores cost considerably less to start and operate.
Figure 2: University of Michigan Consumer Sentiment Index
Source: University of Michigan
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Government intervention is a slight risk among northern businesses. A certain percentage of
enterprises in native communities must be owned by natives. The company bears this risk by
providing significant community donations and through making efforts to hire natives. Cost
drivers for grocers are employee turnover, crude prices, and food prices (seen below). There is
also a high barrier to entry in the industry as it is capital intensive. Although convenience
stores cost considerably less to start and operate.
Disclaimer This report was written by a student currently enrolled in a program at the Sprott School of Business. The purpose of this report is to demonstrate the investment analysis skills of Sprott students. The analyst is not a registered investment advisor, broker or an officially licensed financial profes-sional. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any securities. This report is written solely for the consideration of this student managed investment fund and should not be used by individuals to make personal investment decisions. Unless otherwise noted, facts and figures included in this report are from publicly available sources. We cannot guarantee that the information in this report is 100 percent accurate, although we believe it to be from reliable sources. Information contained in this report is only believed to be accurate as of the day it was published, and it is subject to change without notice. It cannot be guaranteed that the faculty or students do not have an investment position in the securities mentioned in this report.
Buy, Price Target $30.22
Investment Positives
This investment position is one of the steadiest in the market. Its product is a necessity and its
operations experience low competition. The stability of its communities are guaranteed by the
government and the prosperity of the diamond mining industry.
The company is providing a 4.55% dividend yield. The yield has ranged from 4 to 7% in the
past 8 years and has averaged 80% of the diluted earnings per share.
Growth opportunities will never cease for the company. Opportunities consist of new store
openings due to population growth, use of Giant Tiger franchises in urban centers, and
expansion of services offered in existing stores.
Investment Negatives
Small capital gains. Although secure, there is slow growth within this company. This is a norm
for the grocery industry. Other firms (such as the competitors previously mentioned) have
been acquiring large firms with high growth potential to compensate; a move not played by
The North West Company.
We calculated only a slight undervaluation for the company, therefore our hopes for the stock
to rise are limited. Our thesis is that the price will stay relatively stable and we will collect a
healthy dividend.
Long term economic prosperity is not guaranteed. We spoke to the guaranteed prosperity in
the short term, but we can not predict government policies towards the territories over the
long term. The prosperity of the diamond mining industry is also not guaranteed in the long
term.
Overall, we feel positive about The North West Company’s future. Although we expect capital
gains to be limited we are extremely pleased with the high dividend this company provides,
which we feel is very attractive in today’s low interest rate environment. We recommend The
North West Company as a buy.
Investment Recommendation
The Fund @ Sprott | Equity Research
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Appendix: Comparative Analysis Table
Note that Loblaw has recently acquired shoppers drug mart and does not have a full year’s
revenue since then for proper comparison sake.
Company AverageThe North West
CompanyLoblaw Metro EmpireCo Kroger Delhaize
Market Cap ($MM) $10,369 $1,219 $24,464 $7,720 $8,073 $32,427 $7,705
Enterprise Value ($MM) $13,331 $1,309 $34,719 $7,298 $9,995 $39,388 $6,970
Credit Rating BBB NR BBB BBB NR BBB BBB-
P/E 18.54 19.4 - 17.8 18.4 19.9 -
Debt to Equity 68.78 56.7 118.1 39.4 60.9 209.6 55.1
