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Safeway (NYSE:SWY) is a food and drug retailer in North America. Its closest competitors include Whole Foods (NASDAQ:WFM) and The Kroger Co. (NYSE:KR). Today, Goldman Sachs (NYSE:GS) reaffirmed its Sell rating on Safeway. Morningstar agrees with Goldman and rates Safeway's fair value at $10.00. However, other analysts, including Seeking Alpha writers paint a rather rosier picture of Safeway and say it is immensely undervalued (e.g. here).

Reasons to sell Safeway,

  • Even though the company is near its 52-week low of $14.73, Safeway is still very overvalued at the current share price of $16.35. Rating agencies such as Morningstar rate Safeway's fair value at around $10 per share.
  • Safeway has lost many of its consumers to low-cost operators which it cannot compete with. It also faces problems targeting the higher-end type of consumers as Whole Foods has already established itself as the leader in this area.
  • Higher costs, particularly food costs, will reduce Safeway's gross margin and net profit as it struggles to compete with better positioned competitors.
  • Walmart's (NYSE:WMT) continuing growth in Canada will cut into Safeway's margins as it struggles to compete with the retailing giant. About 30% of Safeway's operating profit is from Canada so this is very worrying for potential investors.

However,

  • Safeway's capital expenditures in its Lifestyle upgrade provides the company with a completely new fresh look which should help it bring back some of the customers it has lost to other companies. Safeway should now also be able to reduce its capital expenditures now it has finished its revamp.
  • As the economy continues to recover, Safeway's products will become more viable for the average consumer causing an increase in demand and a return to profitability.
  • Safeway also offers an attractive dividend with a 4.28% projected annual yield. Its last dividend was in the amount of 17.50 cents and it pays a quarterly dividend.

Consequently, Safeway is not a strong sell as Goldman Sachs and Morningstar indicate, but neither is it worth an investment as investors are not likely to see substantial returns on this stock for a long time. However, the stock market is a fickle creature so I may be proven wrong.

Source: Safeway: Numerous Challenges Suggest Avoidance Is The Best Strategy