Value Line has initiated coverage of Jean Coutu Group (PJC.A.TO), a leading pharmacy retailer in Canada, in The Value Line Investment Survey. The company was founded in 1969 by Jean Coutu, who opened his first discount pharmacy in Montreal that year. In 1973, it was incorporated under the legal header Services Farmico. Later on, in 1986, the company changed its name to The Jean Coutu Group and completed an initial public offering. It currently trades under the ticker symbol PJC.A.TO on the Toronto Stock Exchange.
Since its inception, Jean Coutu has grown tremendously both organically and through acquisitions. The company now has over 410 franchised locations in Quebec, New Brunswick, and Ontario, where it operates under the names PJC Jean Coutu, PJC Clinique, and PJC Sante Beaute. In addition, its Pro Doc Ltd. business, which was acquired in 2007, manufacturers and sells generic drugs to wholesalers and pharmacists. Jean Coutu is currently the second-largest pharmacy retail chain in Canada, with principle offices in Longueuil, Quebec.
The company currently operates through two reportable business segments: Franchising and Generic Drugs. The franchising segment consists primarily of merchandise sales to PJC franchisees, mostly through the firm's distribution centers, and made up most of the top line in fiscal 2013 (ended March 1, 2014). Meantime, Generic Drugs is comprised of sales from Jean Coutu’s Pro Doc subsidiary. Prior to April 20, 2012, the company had a third reportable segment through its investment in U.S. pharmacy chain Rite Aid Corp. (RAD), but it has since eliminated this line from the income statement (more below).
Recently, the Pro Doc business, which boasts high margins, has been the highlight of Jean Coutu’s operations, amid sluggish results at its traditional pharmacy business. Indeed, ongoing success at this unit is expected to drive top- and bottom-line gains in this year and next, though it remains a smaller portion of the overall business. Meantime, Jean Coutu recently sold its remaining stake in Rite Aid marking its exit from the United States. Although this investment has had positive effects of late, as Rite Aid is doing well, this move will make for a clearer representation of the company’s performance going forward.
As for the stock, it has performed relatively well since the start of 2014, advancing about 30% over the past several months. At this juncture, Jean Coutu shares are trading well above historical price levels. And, although longer-term capital gains may be limited due to the recent rise in price, this issue does not have much risk associated with it. The stock has a low Beta and strong mark for Price Stability. What’s more, the company appears to be on solid financial footing.
Indeed, shareholders should note the company’s healthy balance sheet. Jean Coutu has over $74 million in cash (as of 3/1/14) and no debt. This allowed management to boost the quarterly dividend by 17.6% recently, bringing its payout to $0.10 a share. And, the company will likely continue to grow its dividend in the years ahead. In addition, the board has authorized an 8.2 million stock repurchase program, which ought to further boost shareholder value.
All told, Jean Coutu seems to have a strong grip on its market, and results should remain stable. Now that the company has relinquished its vested interest in the United States, a clearer picture of its operating results ought to emerge soon, allowing for a truer representation of performance. We advise interested subscribers to consult our full-page review in the current issue of The Value Line Investment Survey, as well as any supplementary reports that may follow detailing newsworthy items with regard to Jean Coutu.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.