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On today’s TSX Breakouts report, there are 22 stocks on the positive breakouts list (stocks with positive price momentum), and 36 stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that is on the negative breakouts list - Empire Company Ltd. (EMP-A-T).

Grocery store stocks realized strong gains during the first three quarters of 2019. Given the solid run-up in the share prices, these stocks became fully valued. Consequently, the positive price momentum paused.

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Since Oct. 7, Empire’s share price has declined approximately 7 per cent. While the share price remains under pressure, further price weakness may represent a future buying opportunity. As the share price continues to pullback, this is a stock to watch.

A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Headquartered in Stellarton, N.S., Empire is a leading food retailer with more than 1,500 grocery stores located across the country under banners that include Sobeys, Safeway, IGA, FreshCo, Foodland, Thrifty Foods, and Farm Boy. The company has two core business segments, food retailing, and investments and other operations, which includes its investment in Crombie REIT (CRR-UN-T).

Before the market opened on Sept. 12, the company reported its first-quarter fiscal 2020 financial results (its fiscal year-end was May 4).

Adjusted earnings per share came in at 49 cents, a penny ahead of the consensus estimate. Same-store sale growth (excluding fuel) increased 2.4 per cent. EBITDA (earnings before interest, taxes, depreciation and amortization) margin was 6.8 per cent in the quarter. The share price was relatively unchanged that day, declining 23 cents to $35.64 from $35.87.

Management remains focused on streamlining its operations, reducing expenses and increasing profitability, through its Project Sunrise initiative. For fiscal 2020, management expects to realize at least $250-million in cost savings. In fiscal 2019 and 2018, the company achieved savings of $200-million and $100-million, respectively.

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Another core objective by management is for the company to expand its presence in the discount grocery store segment in western Canada by converting its existing stores to the FreshCo banner. In December of. 2017, management targeted converting up to 25 per cent of its 255 Safeway and Sobey’s stores in western Canada to this discount format within five years. Last quarter, the company converted 10 Safeway stores to FreshCo stores.

Dividend policy

Empire pays its shareholders a quarterly dividend of 12 cents per share, or 48 cents per share yearly. This equates to a current annualized yield of 1.4 per cent.

Management is firmly committed to returning capital to its shareholders. Since 2011, the company has announced a dividend hike in June of each year. Most recently, in June 2019, the company announced a 9 per cent dividend increase, raising its quarterly dividend to its current level of 12 cents per share from 11 cents per share.

During the first quarter of fiscal 2020, the company repurchased 547,300 shares at an average price per share of $34.62 for $18.9-million as part of its share buyback program. Management targets repurchasing $100-million worth of shares in fiscal 2020.

Analysts’ recommendations

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This mid-cap stock with a market capitalization of $9.35-billion is covered by 10 analysts, of which six analysts have buy recommendations, and four analysts have neutral recommendations.

The firms providing research coverage on the company are as follows in alphabetical order: Barclays, BMO Nesbitt Burns, CIBC World Markets, Desjardins Securities, ISS-EVA, National Bank Financial, RBC Dominion Securities, Scotiabank, TD Securities and Veritas Investment Research.

Revised recommendations

Over recent weeks, analysts have been revising their expectations.

In October, Desjardins’ Keith Howlett increased his target price to $37 from $36. Anthony Campagna, an analyst at ISS-EVA, upgraded his recommendation to an “overweight” from a “hold.”

In September, National Bank’s Vishal Shreedhar lifted his target to $39 from $38. Barclays’ Karen Short raised her target to $45 from $36 (the high on the Street). RBC’s analyst Irene Nattel raised her target by $2 to $37. Scotiabank’s Patricia Baker increased her target by $4 to $42. CIBC’s Mark Petrie hiked his target to $39 from $34.

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Financial forecasts

The Street is forecasting earnings per share of $2.06 in fiscal 2020, up from adjusted earnings per share of $1.50 reported in fiscal 2019, with earnings expected to climb to $2.31 in fiscal 2021.

Earnings expectations have been relatively stable for this fiscal year. For instance, three months ago, the Street was forecasting earnings per share of $2.08 in fiscal 2020.

Valuation

The stock is commonly valued on a sum-of-the-parts basis, individually evaluating the different business segments of the company’s operations.

The average one-year target price is $39.33, implying the share price may increase 14 per cent over the next 12 months. Individual price targets provided by nine firms are as follows in numerical order: $36 (the low on the Street is from Kathleen Wong, an analyst at Veritas Investment Research), three at $37, two at $39, two at $42, and $45 .

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Insider transaction history

Year-to-date, four insiders have reported transactions in the public market.

Most recently, on July 30, Simon Gagné, executive vice-president – human resources, exercised his options, receiving 20,543 shares (the exercise price was not disclosed), and sold 20,543 shares at an average price per share of approximately $35.15. His remaining share balance after these transactions stood at 14,043 shares.

On April 2, director James Dickson invested nearly $63,000 in shares of the company. He acquired 2,150 shares at a price per share of $29.2727 for an account in which he has control or direction over (SJD Management Ltd.), increasing this account’s holdings to 15,500 shares.

On March 18, president and chief executive officer Michael Medline purchased 10,600 shares at a price per share of $28.2788, raising his account’s holdings to 40,600 shares. The cost of this investment totaled approximately $300,000.

On March 18, chief financial officer Mike Vels invested over $84,000 in shares of the company. He bought 3,000 shares at a price per share of $28.20.

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Chart watch

Year-to-date, the stock is up over 19 per cent, slightly outperforming its peers, Loblaw Companies Ltd. (L-T) and Metro Inc. (MRU-T), which are up 14 per cent and 17 per cent, respectively.

However, this year-to-date strength has waned.

The fourth-quarter is off to a challenging start for grocery store stocks. Quarter-to-date, share prices for Empire Company, Loblaw, and Metro, are down 4 per cent, 7 per cent and 5 per cent, respectively.

In the near-term, the share price remains under pressure. The stock is approaching oversold territory. The RSI (relative strength index) is at 36. Generally, an RSI reading at or below 30 reflects an oversold condition. Consequently, we may see a little more downside in the share price before it stabilizes.

Looking at key technical resistance and support levels, the stock has a major ceiling of resistance is around $37. After that, there is overhead resistance around $40. Should the share price continue to retreat, there is technical support around $32, which is close to its 200-day moving average (at $32.33).

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

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