Forecast PJCs Performance for the Next Year

As potential investors, we should take an in-depth look at the PJC's consolidated balance sheets, consolidated statements of earnings, consolidated statements of income and consolidated statements of cash flow. Given that our goal is to maximize return out of our investment, we are going to look at the corporation's performance. Therefore, we will conduct a ratio analysis in order to forecast PJC's performance for the next year and hence, determine if it will be a good investment. As investors, we are more concerned about the upside potential of the firm. As such, we will concentrate on performance factors in our analysis, such as the profit margin ratio, the ROA, the ROE and the earnings per share ratios. On the other hand, we will have to be cautious because Jean Coutu's 2008-2009 results are influenced by Rite Aid's downfall. Therefore, we will analyze the ratios while taking into account that, by itself, Jean Coutu's sales are growing. Before starting the analysis, it would be useful to specify the type of a company Jean Coutu is and the sector it covers. Thereby, the Jean Coutu Group is recognized as a leader in the pharmaceutical and para-pharmaceutical industry of retailing and distribution of products in Canada.

To understand the net income (loss) of the company, one should turn to the income statement and analyze it in the most concise way possible to give a reliable assessment. Thus, it is important to mention that the gross margin of Jean Coutu has been on the rise since 2007. Indeed, the company increased its profits by 3.3% between 2008 and 2009. This is a good sign for the future, especially as the economy was in recession during this period.

However, Jean Coutu's net income is a negative figure of $1.192 billion. The main reason for this loss was the significant fall in shares of Rite Aid. It is important to note the fact that Jean Coutu entered an agreement with Rite Aid on June 24th, 2007. This agreement involved the acquisition of 28.4% of Rite Aid's shares, which represent 252 million shares of Rite Aid by Jean Coutu. This acquisition was one of the worst made by Jean-Coutu, since Rite Aid shares lost two-thirds of their value since the acquisition. In fact, during the past year, a share of loss from investments of Rite Aid caused Jean Coutu to lose $1327 billion dollars.

In this perspective, it is clear that as an investor, the risk of investment in Jean Coutu is significantly lower than the previous years because the value of investments in shares of Rite Aid has been reduced significantly compared to the purchase value. For this reason, the possibility of gaining profits is indeed greater than the risk of accumulating losses at this moment because, as mentioned previously, the operating activities of Jean Coutu Group continue to grow. Moreover, the company ranks in third place in the drug store industry in Canada as well as first in Quebec. Thus, the company is planning to preserve its position as Quebec's leading pharmacy chain by expanding its network by one-third to 400 stores within five to seven years. This element makes the company a sound long-term investment since the company is trying to grow up in term of stores.

Another element that has to be checked as potential investors is the dividends. Jean-Coutu is paying higher dividends to shareholders. The company rose from $0.12 per share during 2008 to $0.16 per share during 2009. This is generally considered as a positive sign since it means that the Board of Directors believes that there is great possibility of growth for the company. In addition, this is can be considered as a high guaranteed return since it represents 1.65% of the actual value of the company in the stock market.

In order to assess the recent performance of PJC Inc., we must conduct a ratio analysis over 2008 and 2009. We will first analyze the performance ratios of the company. Firstly, ROA went down from -1.94 to -2.55. This ratio is useful for investors because it allows them to assess the company's performance and its future growth. Jean Coutu's ROA decreased over 2008 and 2009, which might indicate that the company is not performing well. But if investors look at it closely, they will realize that although net income is decreasing, revenue is increasing. In fact, in the company's income statement, there is an expense called "Share of loss from investments subject to significant influence" of $1,192,100. This expense is related to the acquisition of Rite Aid discussed above. Without this expense, PJC Inc. would not have a net loss. Without the net income loss due to Rite Aid, the growth of the company has been increasing over the past year. In fact, earnings before interest and tax increased by 35% from 2008 to 2009. This is a good sign for the future health of the company because we can see that gross operating profit is increasing.

In this light, it is interesting to note the change in inventory turnover ratio. This ratio shows the average length of time that costs remain in inventory. PJC's performance has increased over the past year, since the turnover ratio has increase from 9.34 times in 2008 to 12.33 times 2009. If we compare this ratio to that of Jean Coutu's main competitor, Shopper's Drug Mart, we can see that Jean Coutu has a more favourable ratio. The age of inventory for Jean Coutu increased from 2008 to 2009, from 39.6 to 29.6 days, compared to 76.5 days for Shoppers Drug Mart.

The second performance ratio we will analyze is ROE, which decreased from -0.14 to -1.23. This ratio indicates the return shareholders receive on their investment. The source of its downturn is the company's net loss. By looking at a company's ROE, investors can forecast the company's future return and invest in the corporation's common shares. Investors may be scared away by looking at PJC Inc.'s numbers, but Jean Coutu is not doing as bad as investors might think, as shown in the above discussion of the company's acquisition of Rite Aid.

After analyzing the performance ratio, the liquidity ratio has to be analyzed in order to assess the company's ability to meet its short-term obligation. The ratio of 1.23 of 2008 increased to 1.35 in 2008. This ratio shows us that Jean-Coutu has positive short term liquidity since the current assets can cover the current liabilities. This ratio is relevant in this case because PJC'S inventory turnover, as explained above, is going strong. Therefore, it is not necessary to mention the quick ratio, which is generally more conservative than the current ratio.

It is necessary to briefly discuss the second quarter results which were released on October 5th 2009, to see how the company is doing. Thus, the results were very positive since Jean Coutu earned $14.9 million or seven cents per share, for the period ended August 29th, in comparison with a loss of $39.1 million or sixteen cents the previous year.

Before making a final decision regarding whether or not to invest in Jean-Coutu, it is necessary to turn to the stock price of the Toronto Stock Exchange. Thus, the shares closed at $ 9.65 on October 6th, 2009. It is interesting to note that the share price of Jean Coutu has fallen significantly since the merger with Rite Aid. In reality, the share price has seen a fall of 36% since June 7, 2007.

After careful consideration, we have come to the conclusion that Jean Coutu is a sound long-term investment. Even if negative numbers are disclosed on the income statement, it is indisputable that the growth margin of the company is high. In fact, as potential investors who would enter the market, Jean-Coutu is not a very high risk investment especially in relation to these recent years. Indeed, given that the share value of Rite Aid has already lost 77% since the acquisition, Jean-Coutu should no longer be significantly affected by the American company, at least if we speak of a downward trend. Furthermore, PJC's operating activities are experiencing a rising trend reflecting that the company itself generates profits. It is by taking into account these two main factors that we have decided to invest in Jean Coutu. Yet, it is necessary to mention that before taking such decision, it is preferable to not only analyze the company to Rite Aid in order to assess whether it could rise in value in the near future, but also to its competitors. Finally, we should inform ourselves on the rumour about a possible merger between Jean Coutu and Metro and thus analyze the outcomes of the last quarter that came out yesterday, October 5th.

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