Empire Company Limited’s Q2 Profit Falls 12.6%: What Should You Do Now?

Empire Company Limited (TSX:EMP.A) released second-quarter earnings on December 9, and its stock has reacted by falling over 1%. What should you do now?

| More on:
The Motley Fool

Empire Company Limited (TSX:EMP.A), one of the largest owners and operators of grocery stores in Canada, announced mixed second-quarter earnings results after the market closed on December 9, and its stock responded by falling over 1% in the trading session that followed.

The stock now sits more than 19% below its 52-week high of $31.98 reached back on February 24, so let’s take a closer look at the quarterly results and the fundamentals of the stock to determine if we should consider using this weakness as a long-term buying opportunity, or if we should wait for an even better entry point in the days ahead.

Breaking it all down

Here’s a summary of Empire’s second-quarter earnings results compared with what analysts had anticipated and its results in the same period a year ago.

Metric Q2 2016 Actual Q2 2016 Expected Q2 2015 Actual
Adjusted Earnings Per Share $0.40 $0.43 $0.46
Revenue $6.06 billion $6.05 billion $6.00 billion

Source: Financial Times

Empire’s adjusted earnings per share decreased 13% and its revenue increased 1.1% compared with the second quarter of fiscal 2015. The company noted that this weak performance could be attributed to continued challenges associated with its acquisition of Safeway Canada as well as an overall negative customer reaction to its operational challenges and a “difficult economy in the west.”

Here’s a quick breakdown of 10 other notable statistics from the report compared with the year-ago period:

  1. Adjusted net earnings decreased 12.6% to $110.7 million
  2. Sobeys same-store sales, excluding fuel sales, increased 0.9%
  3. Sobeys same-store sales, including fuel sales, increased 0.1%
  4. Gross profit decreased 0.5% to $1.47 billion
  5. Adjusted earnings before interest, taxes, depreciation, and amortization decreased 8.2% to $303.7 million
  6. Operating income decreased 33.2% to $136 million
  7. Cash flows from operating activities decreased 25% to $135.8 million
  8. Reported a cash use of $15.9 million compared to free cash flow of $140 million in the year-ago period
  9. Repurchased 5.37 million shares of its class A non-voting shares for a total cost of approximately $148.1 million, completing the normal course issuer bid that it announced on March 12
  10. Weighted-average number of diluted shares outstanding decreased 0.5% to 275.5 million

Empire also announced that it will be maintaining its quarterly dividend of $0.10 per share, and the next payment will come on January 29, 2016 to shareholders of record at the close of business on January 15, 2016.

Should you buy Empire’s stock on the dip?

It was a disappointing quarter overall for Empire, so I think the market responded correctly by sending its stock lower. With this being said, I think the drop also represents an attractive long-term buying opportunity, because the stock now trades at very inexpensive valuations and because it is a dividend-growth play.

First, Empire’s stock now trades at just 14.8 times fiscal 2016’s estimated earnings per share of $1.74 and only 12.8 times fiscal 2017’s estimated earnings per share of $2.01, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 15.2 and the industry average multiple of 27.

I think Empire’s stock could consistently trade at a fair multiple of at least 15, which would place its shares upwards of $30 by the conclusion of fiscal 2017, representing upside of more than 16% from today’s levels.

Second, Empire pays an annual dividend of $0.40 per share, which gives its stock a 1.6% yield. This small yield may not seem like much at first, but it is very important for investors to note that the company has raised its annual dividend payment for 20 consecutive years, making it one of the market’s top dividend-growth plays.

With all of the information provided above in mind, I think Foolish investors should strongly consider using the post-earnings weakness in Empire’s stock to begin scaling in to long-term positions.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

More on Investing

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »