Nesbitt increases target to $59 for Shoppers Drug Mart (SC)

Brief Excerpt from the following PDF from BMO Nesbitt Burns (attached):

Impact
Neutral. Results were in line. However, we are confused as to why
interchangeability (of generics for branded drugs, driven by changes in the
Ontario Drug Benefit plan) in Ontario was not a major factor for margin growth
as it was in Q2/07. This issue has an important bearing on how investors should
view ongoing normalized earnings growth.

Forecasts
We have increased our fiscal 2007 EPS assumption to $2.26 to reflect Shoppers’
EPS performance in Q3/07 relative to our forecast. We have not made any
changes to our fiscal 2008 EPS estimate of $2.54. We are introducing a 2009
EPS estimate of $2.73, representing earnings growth of 7.5%.

Valuation
We are rolling our valuation one year forward to 2009, but our target multiple of
11.5x remains the same. Based on 11.5x our new 2009 EBITDA estimate, our
target price increases to $59 from $54.

Recommendation
Shoppers remains a Market Perform-rated stock. However, we remain concerned
that Shoppers’ growth in sales and profitability is not sustainable at current
levels, which appears to us to be at odds with the lofty valuation assigned to the
stock. The market potentially caught a glimpse of a declining rate of EPS growth
in Q3/07, where reported EPS growth was 15.8% versus18.5% in the first half
of 2007. We expect the stock to continue to trade in a narrow range.