The last few years haven’t gone very well for Empire Company Limited (TSX:EMP.A).
It started back in 2014, when the company acquired Safeway’s Canadian operations for $5.8 billion. Safeway is big in Western Canada, while Sobeys, Empire’s main brand, had a much bigger presence in the east. The two brands seemed to fit together nicely.
It has not been a smooth transition. Western Canada – especially Alberta – saw general economic weakness starting just after the deal closed. Empire also replaced Safeway’s popular store brand items with their own, and axed Safeway’s loyalty program. Shoppers responded by taking their dollars to competing chains.
Empire shares are currently down nearly 40% from their 2015 peak.
But things are looking up. Recent earnings were better than expected.
Analysts expect earnings to be $0.90 per share in 2017 and $1.02 in 2018, a big improvement versus 2016, which was marked by big losses. Remember, Empire earned $1.51 per share as recently as 2015.
Empire is also cheap on a price-to-sales perspective. It trades at just 0.2 times sales, while its competitors are closer to 0.5 or 0.6 times sales. Empire also trades at 1.4 times book value, while competing stocks trade closer to two times book.
Empire also sports a much larger dividend than its peers. Its current yield is 2.2%, while both of Canada’s other main grocers pay yields closer to 1.6%. Empire has grown its dividend annually for the last 20 years and has a low payout ratio.
If Empire can replicate 2015’s earnings of $1.51 per share and trade at just 15x earnings, it has approximately 20% upside from today’s price.
