Neighbourly Pharmacy is my Top Pick, this portfolio manager says

Investors are running for shelter these days and for good reasons, as interest rates continue to climb and the market stands firm in its dislike for growth-oriented stocks in the tech space. But there are good options if you’re looking for stocks with both defensive properties and good growth prospects. So says Paul Gardner of Avenue Investment Management, who just nominated Canadian pharmacy network consolidator Neighbourly Pharmacy (Neighbourly Pharmacy Stock Quote, Charts, News, Analysts, Financials TSX:NBLY) to his top pick list for the 12 months ahead.

“Neighbourly Pharmacy got hurt by the liquidity strike that happened generally to the stock market, so it got knocked down, but we think this is not only defensive but offensive because their margins are incredibly good and they’re growing beyond what everyone had expected in the analyst world. We think it’s poised to outperform,” said Gardner, speaking on BNN Bloomberg on Tuesday.

“You’re dealing with drugstores and drugstores are not only great from a defensive asset class but they’re great [because] pharmacies have become more where we visit every day — there are so many services they provide not only for the province but for medical care. We think this is a great acquisition story,” he said.

Toronto-based Neighbourly Pharmacy is an acquirer of independent pharmacies across Canada focusing on promoting the drugstore as a primary healthcare hub for communities. The company had its public launch a year ago with an IPO generating about $200 million in proceeds, with the ensuing 12 months seeing Neighbourly grow its stable of stores from 145 at its IPO last May to now 271. A big jump in store count came this year with the acquisition of Rubicon Pharmacies and its 100 locations for $435 million.

“The pharmacies within this primarily rural portfolio are similar to our own, acting as the centre of healthcare delivery for smaller, underserved communities. However, our greatest similarity is our shared values: both companies place an unmatched priority upon patient-focused care,” said Neighbourly CEO Chris Gardner in a press release.

The Rubicon deal is still waiting to close, with Neighbourly having shored up its supplies in the meantime through a public offering and private placement generating proceeds of $288 million. 

Neighbourly still has a lot of runway in Canada and its prospects are looking good, says Paul Gardner.

“It’s small cap in nature but it has grown. It’s a fantastic opportunity to consolidate retail drugstores in more rural and suburban areas in the Prairies,” Paul Gardner said. “They just did a large acquisition with a company called Rubicon and the accretion of those pharmacies really added to their bottom line.”

“It’s not really much of a dividend play. It’s more growth by acquisition,” he said.

Interested investors will be looking to Neighbourly’s next quarterly financials due on June 23, the company’s fourth quarter fiscal 2022. For its fiscal Q3, Neighbourly saw revenue rise by 27 per cent to $139.2 million, with the addition of 41 pharmacies over the previous four quarters accounting for the increase. Adjusted EBITDA for the quarter was up 17 per cent to $14.5 million while same-store sales were up by 2.2 per cent, which was a drop from 5.5 per cent a year earlier. Management said the difference came down to better comps last year due to COVID-related government policies put in place in the earlier days of the pandemic in 2020 which, in turn, made 2021’s numbers look relatively strong.

“Although we have already exceeded our historical pace of acquisition, the Canadian pharmacy landscape continues to offer a robust pipeline of compelling opportunities, and we look forward to further execution of our growth strategy,” said Chris Gardner in a February press release.

One fan of Neighbourly is investment bankers iA Capital Markets where analyst Chelsea Stellick issued in March a “Buy” rating on the stock, figuring there are thousands more stores for Neighbourly to acquire across the country.

Commenting on the Rubicon acquisition, Stellick said its locations fit with NBLY’s own stores in that they’re mostly found in uncrowded markets with similar pharmacy to front-of-shop sales.

“Neighbourly’s acquisition of Rubicon Pharmacies aligns with management’s superb track record of aggressive expansion without compromising on and executing on only the most complementary deals,” Stellick wrote in a March 21 report to clients. 

“The addition of 100 pharmacy locations to the Neighbourly portfolio materially increases the Company’s scale and further cements the brand in Western Canada. There remain around 3,600 potential acquisition targets across Canada, and we expect continued aggressive expansion during and following the integration of Rubicon,” Stellick said.

NBLY shares took off from the IPO to rise from $20.50 on May 25 of last year to just under $40 by the end of December. It’s been a long trip down over the first half of 2022, however, as the stock has returned to about the $25 mark.