Why Empire Company Limited Soared 14.48% on Thursday

Empire Company Limited (TSX:EMP.A) soared 14.48% on Thursday following its Q1 2018 earnings release. What should you do now? Let’s find out.

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Empire Company Limited (TSX:EMP.A), one of the largest owners and operators of grocery stores in Canada, announced its fiscal 2018 first-quarter earnings results before the market opened on Thursday, and its stock responded by soaring 14.48% in the day’s trading session. Let’s break down the quarterly results and the fundamentals of its stock to determine if this could be the start of a sustained rally higher and if we should be long-term buyers today.

The results that ignited the rally

Here’s a quick breakdown of 10 of the most notable financial statistics from Empire’s 13-week period ended on August 5, 2017, compared with its 13-week period ended on August 6, 2016:

Metric Q1 2018 Q1 2017 Change
Sales $6,273.2 million $6,186.6 million 1.4%
Gross profit $1,531.0 million $1,490.8 million 2.7%
Adjusted EBITDA $278.8 million $243.1 million 14.7%
Operating income $125.2 million $126.6 million (1.1%)
Adjusted net earnings $87.5 million $73.6 million 18.9%
Adjusted earnings per share (EPS) – fully diluted $0.32 $0.27 18.5%
Book value per common share $13.57 $13.49 0.6%
Free cash flow $119.7 million $455.6 million (73.7%)
Same-store sales growth (decline) 0.5% (1.8%) 230 basis points
Same-store sales growth (decline) excluding fuel 0.5% (1.2%) 170 basis points

What should you do now?

Empire kicked off fiscal 2018 with a very strong first-quarter performance, and the results crushed the consensus estimates of analysts polled by Thomson Reuters, which called for EPS of $0.22 on revenue of $6.18 billion, so I think the large pop in its stock was warranted. I also think the stock still represents an attractive long-term investment opportunity for three fundamental reasons.

First, it’s back on the path of growth. Empire’s adjusted EPS dropped 18.5% to $1.50 in fiscal 2016 and it plummeted 53.3% to $0.70 in fiscal 2017 as the company faced numerous challenges, including a “softening sales trend,” but it achieved 18.5% growth to $0.32 in the first quarter of fiscal 2018, and analysts currently expect it to achieve 22.9% growth to $0.86 in the full year of fiscal 2018. The growth is expected to continue in fiscal 2019, with current estimates calling for 51.2% growth to $1.30, and even though it would still be well below the $1.50 it earned in fiscal 2016, it does appear that the company’s days of negative growth are over.

Second, it’s undervalued based on its growth. Even after the +14% pop, Empire’s stock trades at 26.3 times fiscal 2018’s estimated EPS of $0.86 and just 17.4 times fiscal 2019’s estimated EPS of $1.30; these multiples may seem high at first glance, but I think they are actually very attractive given its current high-double-digit percentage earnings-growth rate.

Third, it’s a dividend-growth superstar. Empire currently pays a quarterly dividend of $0.105 per share, equal to $0.42 per share annually, which gives it a yield of about 1.9%. A 1.9% yield is far from high, but what Empire lacks in yield it makes up for in growth; it has raised its annual dividend payment for 22 consecutive fiscal years, and its 2.4% hike in June has it positioned for fiscal 2018 to mark the 23rd consecutive fiscal year with an increase.

With all of the information provided above in mind, I think Foolish investors should consider initiating long-term positions in Empire today with the intention of adding to those positions on any significant pullback in the future.

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 stock mentioned.

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