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Why Empire Company Limited Soared 14.48% on Thursday

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.

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

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