Safeway: Time to Checkout -- Barron's

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Safeway: Ripe For A Fall? by Kopin Tan

Highlighted companies: Safeway (SWI), Whole Foods (WFMI)
Summary: Grocery retailer Safeway's canny upgrade of its supermarkets to lifestyle stores offering quality prepared foods and fancy vegetables has fueled 80% of company growth and pushed its stock up 48% in 06'—three times the average industry gain. But Safeway may be overripe due to 1) A high 17.8 P/E and a 4 1/2 year stock price high of $35. 2) The fancier shopping experience works in wealthier neighborhoods but the next stage of upgrades in poorer areas will be a harder sell. 3) Increasing competition from high (Whole Foods (WFMI)) to low (corner deli) end rivals and foreign invaders (Tesco) will make meeting 12-15% growth projections harder in a low margin industry. 4) Safeway says its new Blackhawk gift card kiosks' profit potential is vast because of a commission with each sale but no inventory expense, projecting Blackhawk will add $50 million to earnings in '06, double that in '07. But it's a risky start up and competition will lower commission rates. CIBC analyst Perry Caicco says Blackhawk's an underestimated earnings booster already, leaving little room for upside. 6) Safeway's high P/E and stock price will deter any buyout suitors. UBS analyst Neil Currie projects a P/E of 15 in 2007, with earnings of $1.90, meaning Safeway should be worth about $29. Bottom Line: Shares surged 48% in '06 to a recent $35, but the many challenges facing Safeway make the stock probably worth closer to $30.

Related: More coverage of Food/Restaurant stocks.