On today’s Breakouts report, there are just five stocks on the positive breakouts list (stocks with positive price momentum), and 51 stocks are on the negative breakouts list (stocks with negative price momentum).
Highlighted today is a stock that is less than 1 per cent away from appearing on the positive breakouts list - Empire Company Limited (EMP-A-T). Its share price has rallied 9 per cent over the past three trading sessions after the company reported better-than-expected quarterly earnings results. However, this near-term price momentum may soon stall until investors receive further evidence of earnings momentum.
A brief outline on Empire 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 1,600 grocery stores located across the country under banners that include Sobeys, Safeway, IGA, FreshCo, Foodland, FreshCo and Longo’s. The company has two main reporting segments, food retailing, and investments and other operations, which includes its investment in Crombie REIT (CRR-UN-T).
Investment thesis
- Strong leadership.
- Resumption of earnings growth forecast by the Street. On the earnings call, chief financial officer Matt Reindel anticipates a “gradual and consistent” improvement in same-store sales growth in fiscal 2024.
- Attractive valuation.
- Key risks to consider: 1) consumer behaviour shifting to discount grocery stores due to food inflation. Empire has a large proportion of conventional stores versus discount stores, which is reflected in its lower same-store sales growth compared to its industry peers (Empire’s same-store sales growth of 2.6 per cent reported on June 22, Loblaw’s food same-store sales growth of 3.1 per cent reported on May 3 and Metro’s food same-store sales growth of 5.8 per cent reported on April 19) ; 2) weak investor sentiment for grocery retailers (lack of buyers) may limit upside potential in the share price in near-term. Investors will want to see further evidence of earnings growth over the coming quarters.
Returning capital to its shareholders
Empire pays its shareholders a quarterly dividend of 18.25 cents per share, or 73 cents per share yearly. This equates to a current annualized yield of 2 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 22, management announced an 11 per cent dividend increase, raising its quarterly dividend to its current level of 18.25 cents per share from 16.5 cents per share.
During the fourth quarter of fiscal 2023, the company repurchased 3,110,280 shares at a weighted average price per share of $35.91. In fiscal 2023, the company repurchased 9,444,902 shares at a price of $37.06.
Quarterly earnings and outlook
Before the market opened on June 22, the company reported its fourth-quarter fiscal 2023 financial results (the company’s 2023 fiscal year-end was May 6). A
djusted earnings per share came in at 72 cents, ahead of the consensus estimate of 67 cents and up from 68 cents reported during the same period last year. Same-store sale growth (excluding fuel) was 2.6 per cent. EBITDA (earnings before interest, taxes, depreciation and amortization) was $598.8-million, surpassing the Street’s forecast of $576-million and up 12.6 per cent from $586.2-million reported last year. The EBITDA margin came in at 8.1 per cent, up from 7.5 per cent reported last year.
The share price rallied 4 per cent that day on high volume.
On the earnings call, president and chief executive officer Michael Medline provided a cautiously optimistic outlook, “Moving to market trends, while food inflation remains high, we are pleased to see that it is beginning to moderate. Although we continue to navigate through supply cost increases that are higher than pre-pandemic levels, it appears we reached the peak in our Q3 [third quarter] as supplier requests moderated this quarter in both magnitude and volume. We expect supplier cost increase request will continue to moderate over the coming quarters. This is supported by most ingredient commodities coming off their highs, such as wheat, flour and various cooking oils. For several quarters, we have said that as inflation abates, Empire will be well positioned, and in Q4 [fourth quarter] we began to see early indications of this reflected in our sales performance and in our tonnage. We are also continuing to see traffic in our stores improve, with higher transaction counts in Q4, across all regions. Although basket sizes are still lower than last year, we are seeing this trend improve.”
Management’s long-term objective is to deliver between 8-per-cent and 11-per-cent growth in its reported adjusted earnings per share.
Analysts’ recommendations
After the company released its quarterly earnings results on June 22, seven analysts issued research reports, of which five were buy recommendations and two were neutral recommendations.
The firms providing recent research coverage on the company are: BMO Nesbitt Burns, CIBC World Markets, Desjardins Securities, National Bank Financial, RBC Dominion Securities, Scotiabank and TD Securities.
Revised recommendations
After the company reported better-than-expected quarterly earnings results last week, three analysts revised their target prices
- CIBC’s Mark Petrie to $43 from $41.
- National Bank’s Vishal Shreedhar to $41 from $38
- Scotiabank’s George Doumet to $42.50 from $42.
Financial forecasts
Earnings momentum is expected to resume this year after holding steady in fiscal 2023.
The Street is forecasting earnings per share of $3.07 in fiscal 2024, up nearly 10 per cent from adjusted earnings per share of $2.80 reported in fiscal 2023. Earnings per share is expected to climb to $3.36 in fiscal 2025.
According to Bloomberg, the consensus earnings per share forecasts are unchanged from three months ago.
Valuation
The stock is commonly valued on a sum-of-the-parts basis, individually evaluating the two business segments of the company’s operations.
The stock is trading at a discount relative to historical levels, suggesting there is room for multiple expansion According to Bloomberg, shares of Empire are currently trading at a price-to-earnings multiple of 12 times the fiscal 2024 consensus estimate, below its five-year historical average forward P/E multiple of 15 times.
In comparison, shares of Loblaw Companies Ltd. (L-T) are trading at a P/E multiple of 15.5 times the calendar 2023 consensus estimate. Shares of Metro Inc. (MRU-T) are trading at a P/E multiple of 16 times the fiscal 2024 consensus estimate.
Empire’s average one-year target price is $42.36, implying the share price may increase 15 per cent over the next 12 months. Individual price targets are: $39 (from BMO’s Tamy Chen), two at $41, $42, $42.50, $43, $48 (from RBC’s Irene Nattel).
Insider transaction history
In the second quarter of this calendar year, only one insider has reported trading activity in the public market.
On April 12, Mike Venton, general manager of discount stores, exercised his options, receiving 1,100 shares (the exercise price was not disclosed), and sold 1,100 shares at a price per share of $37, eliminating his position in this particular account.
Chart watch
Year-to-date, grocery stocks have been relatively flat. Shares of Empire are up 3 per cent. Meanwhile, shares of Loblaw and Metro are down 1 per cent and down 2 per cent, respectively.
Over the past three trading sessions, the share price has rallied 9 per cent, breaking above its 50-day moving average (at $35.30) and its 200-day moving average (at $35.66).
Looking at key technical resistance and support levels, shares of Empire have a major ceiling of resistance is around $40, and after that around $45 (close to its record closing high of $45.64 reached on April 11, 2022). Looking at the downside, there is initial technical support between $33.50 and $34.
ESG Risk Rating
According to Sustainalytics, the company has an environmental, social and governance (ESG) risk score of 26 as of June 22, 2023. A risk score of between 20 and 30 reflects a “medium risk” rating.
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.
This report should not be considered an investment recommendation.
Jennifer Dowty