Empire Company's 3rd Quarter Is No Cause For Bearishness

| About: Empire Ltd.A (EMLAF)

Summary

Empire Company's stock is trading cheaply at the moment, especially after it's Q3 earnings report.

Short-term issues relating to the Safeway acquisition continue to affect market performance.

Long-term, shareholders who stick with Empire will be rewarded.

Empire Company Ltd. (OTCPK:EMLAF) (EMP.A) has seen its stock price drop considerably in the last year.

The company's third quarter saw a particular hit being taken: Empire's Q3 EPS of $0.30 missed by $0.16, and operating income was down by $1,793.2 million from the $203.4 million recorded for 2015 Q3. In a press release announcing the 2016 Q3 results for Empire Company, Marc Poulin, the President and CEO, explained that:

The challenges that we experienced in the first half of fiscal 2016 related to the integration of our Safeway business only intensified in the third quarter. In addition, increased promotional activity across the West as well as a difficult economic environment mainly in Alberta and Saskatchewan, resulted in sales erosion in our Safeway banner and West business unit.

On November 4th, 2013, Empire announced that they had completed a C$5.8 billion acquisition of Safeway Canada. Long-term, the move provides Empire with a larger share of the Canadian grocery market, particularly in the West. Short-term, however, it left Empire with a lot of debt. Poulin went on:

While these challenges, and the implementation of associated mitigation plans, remain a top priority, it has become apparent that stabilizing our business will take longer than originally expected and has required us to take an impairment charge this quarter.

Short-term, difficulties accommodating the Safeway acquisition remain, and it has affected the share price accordingly. Does that mean that Empire is too uncertain a risk for investors to bother with? I do not believe so.

In fact, long-term, I believe investors will do well with Empire Company Ltd. The firm remains one of the biggest grocery store retailers in Canada with a current market capitalization of C$5.87 billion: trading under the Sobey's brand it operates 1,500 retail stores and 350 retail fuel locations. Empire also retains a 41.5% stake in Crombie REIT, one of the country's biggest real estate owners. It trades on the Toronto Stock Exchange cheaply relative to its industry (a P/E ratio of 14.82 as opposed to an industry average multiple of 25.9), and offers a dividend yield of 1.87%.

The dividend yield may not seem like much, but consider the fact that the firm has a low payout ratio of 24.2%, which means the dividend is in no danger of being cut. Consider also that as of 2015 Q4, free cash flow was C$619 million. Finally, also consider that Empire Company has paid steady/consecutively rising dividends since 1984.

In short, this is a conservative dividend investor's ideal choice: it is currently trading cheaply due to short-term fears, it is a dominant player in its market, and it offers a safe, sustainable dividend.

Disclosure: I am/we are long EMP.A.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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