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Safeway (SWY) is a retailer of grocery products. The company was originally founded in 1926, making it rich in history. It sells groceries and offers prepaid card services through its subsidiary Black Hawk network. Safeway operates its grocery chains primarily through the western half of the United States, and also owns a subsidiary grocery chain that operates in Mexico called Casa Ley, S.A, which operates 185 food and general merchandise stores.

Qualitative Analysis

Safeway has been appeasing investors with increasing dividend yields. The company has aggressively bought back shares over the past several years. In 2008, 388 million shares were outstanding; in 2009, 368 million shares were outstanding; and in 2010, 296 million shares were outstanding. The number of shares outstanding continues to diminish, helping to boost earnings-per-share figures and diminishing the amount of share float supply.

Click to enlarge images.

Source: Shareholder's annual report.

The company has been closing stores -- I have seen the continued trend. In 2009, Safeway had 1,725 stores, in 2010 it had 1,694 stores, and in 2011 it had 1,678 stores. Contrary to what you might imagine, I believe that the store closings can be seen as a positive. This is because the company is closing non-performing stores. Now, Safeway has a lot of revenue, at $43 billion, whereas net income was $516 million in 2011. If Safeway were to figure out a way to improve net profit margins by 1%, this could nearly double net income. This is the upside catalyst behind Safeway. Revenue growth is likely to be slower than net income growth, the company is likely to focus on opening stores in high growth markets, and will close non-performing stores. All the while Safeway continues to offer 4% dividend yields, and buys back a large number of shares. This keeps me optimistic.

Technical Analysis

Safeway has been on a continuous uptrend since October. The stock found severe resistance against the 200-day MA, but I still remain optimistic on the stock. I believe Safeway is on a long-term uptrend and should be considered for a buy opportunity, despite the 200-day MA ceiling.

Source: FreeStockChart.com.

The 20-day MA is trending upward and is likely to cross over the 200-day MA. This implies that a change in the long-term trend is likely to take place, and that investors are going to accumulate more shares in the company. Notable support is at $16.00 per share. Notable resistance is at $19.20, $22.00, and $25.50 per share. I anticipate the stock to rally from current levels ($17.70 per share).

Street Assessment

Analysts on a consensus basis have strong expectations for the company going forward.

Growth Est.

SWY

Industry

Sector

S&P 500

Current Qtr.

13.40%

25.00%

10.80%

8.40%

Next Qtr.

16.70%

200.50%

8.90%

14.80%

This Year

12.90%

35.80%

6.80%

5.50%

Next Year

4.50%

15.50%

4.20%

13.20%

Past 5 Years (per annum)

-4.57%

N/A

N/A

N/A

Next 5 Years (per annum)

9.54%

15.62%

14.01%

9.17%

Price/Earnings (avg. for comparison categories)

8.88

16.44

-20.89

13.49

PEG Ratio (avg. for comparison categories)

0.93

1.19

0.22

0

Source: Table and data from Yahoo Finance.

The company shows reasonable growth as analysts on a consensus basis have a five-year average growth rate forecast of 9.54% (based on the above table).

Earnings History

11-Dec

12-Mar

12-Jun

12-Sep

EPS Est

0.65

0.3

0.49

0.42

EPS Actual

0.67

0.3

0.5

0.45

Difference

0.02

0

0.01

0.03

Surprise %

3.10%

0.00%

2.00%

7.10%

Source: Table and data from Yahoo Finance.

The average surprise percentage is 3% above analyst forecast earnings over the past four quarters (based on the above table).

Forecast and History

Source: Table created by Alex Cho, data from shareholder's annual report, and price history from Yahoo Finance.

The EPS figure shows that throughout the 2007-10 period, revenue growth slowed as the company was adversely affected by the Great Recession. Once the United States economy exited the recession in 2010-11, company earnings started to improve.

Source: Table created by Alex Cho, data from shareholder's annual report.

By observing the chart we can conclude that the business is cyclical and is affected by macroeconomics. Therefore, the largest risk factor for Safeway is the slowing of international gross domestic product growth. As long as the world economy continues to grow, the company will generate outstanding returns over a five-year time span based on the forecast below.

Source: Forecast and table by Alex Cho.

By 2016, I anticipate the company to generate $2.92 in earnings per share. This is because of a return to profitability, improving global outlook, and the continued success of their product offerings. The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next five years.

Source: Forecast and chart by Alex Cho.

Investment Strategy

SWY closed at 17.73 on Dec. 14, and although the holiday season is coming to a close, I remain optimistic. I have a price forecast of $24.68 for 2012, being that there are only 17 days before the end of 2012. It may not necessarily hit that price target due to the short time frame. That means we should move to the long run and focus on 2012-13. In the first quarter of 2013, Safeway will announce earnings for the fourth quarter of 2012. Up until the earnings are announced, the stock should experience a strong run-up. I anticipate the stock will trade to around $24.68-$27.11, implying a lot of upside going forward.

Short Term

Over the next couple months, the stock is likely to appreciate from $17.73 to $24.68-$27.11. This implies 39%-52% upside from current levels. The technical analysis indicates an uptrend in the recent price action, and I anticipate SWY to break above the 200-day MA and continue to trend higher. Therefore, both the forecast model for fundamentals and the market sentiment make me inclined to recommend buying at $17.73 and to sell at $24.68-$27.11. There is notable resistance at $19.20, $22.00, and $25.50 per share. It is likely that the stock will experience minor pull backs at each level throughout the 2012-13 periods.

I would sell the stock beyond $24.68 per share to pocket short-term gains in 2013.

Long Term

The company is a great investment, and I anticipate SWY to deliver on the price and earnings forecast despite the risk factors (global economic slowdown). Safeway's primary upside catalyst is better management, and margin improvement. I anticipate the company to deliver on my forecast price target of $35.92 by 2016. This implies a return of 102% by 2016. The company generates a 3.92% dividend yield currently.

Source: Forecast and chart by Alex Cho.

I'm going to assume that if the stock were bought today it will generate a yield of 8.12% in 2016 based on a $17.73 share price. Since the investor will be collecting yields cumulatively by 2016, the yield will accrue to 29% of the purchase price of $17.73 per share.

The total return on investment is 131%, including dividend yield, yield growth, and stock appreciation. This makes it an amazing growth investment for the next five years.

Conclusion

Safeway is a great investment opportunity. The strong market sentiment and price forecast keeps me an optimist.

Source: Buy Safeway, Even Though It Keeps Closing Stores