RBC names this Canadian retail giant a top pick despite premium valuation

RBC Capital Markets has reiterated Loblaw as its top pick in Canada’s grocery sector, arguing that the retailer’s defensive business model and multiple growth opportunities position it to outperform amid an uncertain economic environment.

The brokerage maintained its positive outlook on the grocery sector, citing structural tailwinds and the ability of leading retailers to deliver consistent growth. RBC expects companies with strong competitive positions to continue trading at the higher end of their historical valuation ranges as investors pay a premium for defensive earnings.

Loblaw stands out because of growth opportunities across its core retail operations and higher-growth ancillary businesses. RBC acknowledged that the stock trades at a modest premium to its historical average and Metro on an enterprise-value-to-EBITDA basis.

However, the brokerage considers that premium justified by Loblaw’s sector-leading operating performance and emerging higher-margin businesses. It also noted that Loblaw trades at a substantial discount to global best-in-class everyday household retailers, suggesting its relative valuation remains attractive.