Has the Stock of Empire Company Limited Gotten Ahead of Itself?

Empire Company Limited (TSX:EMP.A) has been soaring lately. Is there any value left to be had?

| More on:
grocery store

In my previous piece on Empire Company Limited (TSX:EMP.A), I stated that the stock was dirt cheap with a margin of safety, and it was a great rebound candidate for contrarian investors looking for deep value.

The stock is now up over 36% since that article was published just over four months ago. I knew that Empire was an attractive long-term rebound candidate, as it would take many years to clean up the complex organizational mess, but it came as a surprise to me that the stock soared so high, so fast. Is there any upside left in the shares of Empire? Or has the stock run ahead of reality?

Michael Medline, the new CEO at the helm of Empire, has an impressive track record from his time at Canadian Tire Corporation Ltd. He knows the ins and outs of the Canadian retail space, but many pundits questioned his suitability for the job, as he has no real experience in the grocery space. Even if he is a great manager, he’s no miracle worker, and Empire’s organizational structure is in complete disarray.

The grocery sector is a very tough business, and anything short of perfection could be harmful to the company’s long-term top and bottom lines. The margins are thin, and it’s clear that consumers expect better from Empire, and Mr. Medline is going to have to fix operations if he’s going to win the average consumer back. I believe Mr. Medline has what it takes. It’s not like his experience from Canadian Tire won’t come in handy.

What about the valuation?

We all know that Empire’s brands, Safeway and Sobeys, are household names used by most Canadians, but the stock has been on a tear lately, and I believe the easy money has already been made. The stock is no longer in “deep value” territory, but I still think it’s a great play for a long-term investor who is willing to hang on to shares for five or more years.

It’s quite possible that the stock could be ripe for a correction over the next few months because any meaningful changes brought forth by Mr. Medline won’t be realized until at least a year down the road.

The stock currently has a 1.5 price-to-book multiple, which is considerably higher than the company’s five-year historical average price-to-book multiple of one. At this point, I’d probably sit on the sidelines, at least until the stock pulls back to a more attractive valuation in the short to medium term.

Stay smart. Stay hungry. Stay Foolish.

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 Joey Frenette owns shares of Canadian Tire Corporation Ltd.

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 »