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Contrarian Investors: Does Empire Company Limited Offer Deep Value?

It’s no mystery that Empire Company Limited (TSX:EMP.A) has been in the house of pain for nearly two years now. The stock crumbled a whopping 50.5% from its high in 2015. Investors are running scared, and the stock continues its fall into the abyss. As the great Warren Buffett used to say, “…be fearful when others are greedy, and greedy when others are fearful.” When it comes to Empire Company Limited, the fear couldn’t be higher. Does that mean it’s time to be greedy?

If you’re a contrarian investor, then I’m sure you’ve had Empire Company on your radar for quite some time. The stock hasn’t shown any signs of a bottom, and it’s never a good idea to try to catch a falling knife. But one has to wonder how big of a margin of safety was created from the sell-off.

Empire saw profits fall by over 50%, and even the interim CEO is not trying to cover up his disgust over the recent numbers. Francois Vimard, the interim CEO stated, “Today, our business results are unacceptable.”

The management team needs to get their act together, and fast, because investors are getting very impatient with the company. But their lack of patience could be your gain, as the management team is focusing on stabilizing its business, but I believe it will be a long-term process and a rebound overnight is very unlikely.

According to Irene Nattel, an analyst at RBC Dominion Securities, “Meaningful changes to Empire’s complex structure are unlikely to make an impact on its income statement until its 2019 fiscal year.” There’s no question that the managers are scrambling right now, as they try to stop the bleeding caused by same-store-sales decline.

I believe that Empire will rebound over the next few years, as management rethinks its long-term strategy. The company owns great brands like Safeway and Sobeys, and these will always be terrific household Canadian names. It will win customers back eventually once the management team figures out the mess that is the current state of operations.

Empire is dirt cheap right now, as the stock trades at a 0.2 price-to-sales with a 1.3 price-to-book value. The dividend yield is also the highest it’s been in quite a while at 2.64%. I believe there’s a nice margin of safety at current levels, and if you’re a contrarian investor with a long-term horizon, then pick up shares and collect the dividend as you wait for the stock to turn around over the next few years.

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Fool contributor Joey Frenette has no position in any stocks mentioned.

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