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Safeway (NYSE:SWY) put up mixed fourth quarter results that exceeded analyst expectations on the bottom line, but simpy matched estimates on the top line. Earnings of 62 cents were 9% higher than estimates of 57 cents, but sales of $12.8 billion (representing an .8% loss in identical store sales) failed to impress. The good news is, as company management stressed during Thursday's conference call, the first seven weeks of Safeway's current quarter are showing positive sales trends.

Looking at the numbers, Safeway was able to rein in costs during the quarter. Its Operating and Administrative expenses were chopped 44 basis points from 25.26% to 24.82%. Its interest expenses dropped 8% from $98 million to $90 million. This was helped by a $60 million reduction in its long term debt from $4.36 billion to $4.3 billion. Although its gross profit margin fell 56 basis points from 28.64% to 28.08%, the numbers are a bit misleading: If you back out the negative 60 basis point impact of fuel sales, its gross profit actually marginally increased.

Share repurchases: During 2010, Safeway purchased back 27.5 million of its own shares in the open market, reducing its outstanding shares by 7% in the process. With over $1.7 billion still available for further repurchases, these buybacks should act as a real confidence builder in the future. This serves to further illustrate the reality that the stock is a compelling value.

The wildcard: The company’s Blackhawk Network's division (gift card sales) is a "hidden jewel" that could be worth as high as $2 billion; the division rang up an 18% sales gain. Don’t be surprised if the division gets spun off someday, treating Safeway shareholders to a hefty onetime special cash dividend.

Bottom line: This one is way too cheap, selling at only 13 times, very conservative earnings estimates of $1.69. Add in, Safeway's very juicy dividend yield over 2% and you have the recipe for a raging bargain. The fact is, if the supermarket sector starts to see any kind of improving fundamentals at all, this jewel of an equity could easily appreciate 40-50% by year’s end.

Disclosure: I am long SWY.

Source: Why Safeway Could Rise by 40%-50% in 2011