Empire Co. Ltd. is likely to hike its dividend this week as Canada's second-largest food retailer reports earnings that could be pleasing to investors.
Empire, with 1,800 stores across the country, is scheduled to report fourth-quarter results after the close on Wednesday. Management has historically announced an increase to its quarterly dividend during the month of June, and this year should be no different.
The analyst consensus estimate for fourth-quarter earnings per share of $1.51 may be beatable, particularly if there is continued traction in same-store sales and strengthening margins. Empire's same-store sales growth has steadily improved, rising to 1.9 per cent in the third-quarter from 1.7 per cent in the second quarter and 1.3 per cent in the first quarter.
Additional cost synergies from the Canada Safeway acquisition may give margins a lift. Management forecasts annual synergies of about $200-million will be reached within three years - and already more than half of that has been achieved. Management has also been closing underperforming stores, which should improve profitability.
However, the food fight between the supermarkets and the competitive-pricing environment remain a headwind, challenges that management from both Loblaw Cos. Ltd. and Metro Inc. recently highlighted. Last month, Loblaw's management cautioned that "competitive intensity" was expected to remain high, but "relatively stable as industry square footage growth in supermarket-type merchandise moderates."
Valuation
Empire's stock is on special – trading at a discount to peers Loblaw and Metro. The stock is trading at 7.8 times enterprise value to forward earnings before interest, taxes, depreciation and amortization. The valuation has contracted as operational results from its food-retailing segment have been disappointing. In the previous quarter, for instance, the company reported earnings per share of $1.30, beating the Street's expectations of $1.25; however, earnings strength stemmed from the company's real estate equity investments, not from its much larger food-retailing segment.
On a price-to-earnings basis, Empire is trading at a multiple of 14.8 times the forward 12 months consensus earnings estimate.. By comparison, Loblaw is trading at a multiple of 17.7 times and Metro is trading at 16.1 times.
The company's multiple may gradually expand when we see steady, positive growth from its food-retailing segment. However, this will likely not be a one quarter turnaround. It will take time.
Chart watch
The stock price has bounced between $85 and $95 for much of 2015. Year-to-date, the stock price has only gained 2 per cent, below Loblaw, with a 2.7-per-cent gain, and Metro, with a whopping 8.1-per-cent return. Supermarkets and the consumer-staples sector have outperformed the S&P/TSX composite index, which is up just 0.14 per cent.
The stock price is currently trading near its 50-day moving average. The relative strength index is neutral, at 50. I don't believe there is a lot of downside risk for this stock. Last quarter, when the company disappointed the Street with its food-retailing results, the stock pulled back just 1 per cent. There is downside support at $85.80, at its 200-day moving average.
Analysts' recommendations
Most analysts are neutral on this stock. There are four "buy" and six "hold" recommendations. One-year price targets range from $91 to $102 – the average is $96.33, implying a potential gain of 7.8 per cent.
The bottom line
The near-term upside potential may be limited, so I suggest selling on any bounce in the share price. While, I don't expect to see the stock price breaking into the triple digit zone in 2015, it may recover to the mid-$90 range. Should the stock rally back to the mid-$90s, investors may want to take some profits off the table.
Jennifer Dowty, a Chartered Financial Analyst, writes exclusively for Globe Unlimited subscribers.