The Pros and Cons of Owning Empire Company Limited (TSX:EMP.A) Stock

The evidence is mounting that Empire Company Limited’s (TSX:EMP.A) turnaround is taking hold. Here are the pros and cons of buying its stock.

grocery store

It’s been a little over a week since Empire Company Limited (TSX: EMP.A) delivered stronger than expected earnings. That’s gotten some analysts covering its stock excited about Sobeys’s future.

Should you buy EMP.A stock at this point in Empire Company’s turnaround? Here are the pros and cons.

The pros of owning EMP.A

Dubbed “Project Sunrise” by CEO Michael Medline and the rest of the Empire management team, the three-year turnaround plan implemented in May 2017, appears to be gaining traction if its fourth-quarter earnings results are any indication.

Analysts were expecting $0.29 per share; Empire delivered $0.35, almost double its result in the same quarter a year earlier. On the top line, revenues increased by 1.5% year over year to $5.9 billion along with flat same-store sales.

In an operating environment in which the company is trying to find $500 million in annual savings by 2020, while also realigning its management structure to reflect a national rather than regional operation, the results in the fourth quarter should be viewed in a positive manner.

Raymond James analyst Kenric Tyghe believes most of the savings in fiscal 2019 will be achieved in the third and fourth quarters, which means investors will have to take a leap of faith that Medline will come through in the second half of the year.

If the competitive marketplace at the moment wasn’t so darn difficult, I’d be a lot more confident about Empire’s continued success. That said, Fool contributor Kris Knutson reminded investors in June just before earnings that the company’s Q3 2018 free cash flow increased by 3.8% over a year earlier.

For the entire year, Empire grew free cash flow by 27% to $857.1 million — the highest in its history. That’s very good news.

The cons of owning EMP.A

I believe it all comes down to increasing competition from both its traditional larger opponents — Metro, Inc., Loblaw Companies Ltd., and Walmart Inc. — to smaller grocers such as Farm Boy and Longo’s in Ontario, and even Costco Corporation, who are making concerted efforts to capture an online audience.

My Fool.ca colleague Joey Frenette recently went as far as suggesting Sobeys’s lack of uncertainty about who its core customer is makes Empire stock a potential short-sale candidate.

While I’m not nearly as skeptical about Empire Company’s stock — I wouldn’t short EMP.A — I do think the low-lying fruit has already been picked; it will need to seriously up its game if it wants to gain market share over the final 22 months of Project Sunrise.   

While it’s generating higher free cash flow, it would be far more impressive if it were doing so while taking market share.

The verdict

At present, Empire Company’s free cash flow yield (FCF of $857.1 / enterprise value of $7.65 billion) is 11.2%, well into value territory.

It had a big run in 2017, so it was bound to slow down. With the competitive environment, I’m skeptical that it can gain market share. That said, you simply can’t ignore the nearly $1 billion in free cash flow it’s generating.

For this reason, I’d suggest buying a half position and then waiting for a correction to buy some more.

Fool contributor Will Ashworth has no position in any stocks mentioned.

More on Investing

Group of people in a line at an ATM waiting to make a cash withdrawal
Stocks for Beginners

TD vs. Royal Bank: Which Dividend Stock Would I Buy With $10,000?

TD offers slightly more current income, while Royal Bank's broader earnings mix earns my preference for a patient holding.

Read more »

financial chart graphs and oil pumps on a field
Stocks for Beginners

What $10,000 in Freehold Royalties Could Add to Your Income Over a Year

Freehold could produce about $634 in annual income from a $10,000 budget, with commodity prices still influencing the payment.

Read more »

The virtual button with the letters AI in a circle hovering above a keyboard, about to be clicked by a cursor.
Tech Stocks

OpenText’s Revenue Fell Again, But Here’s What Investors Could Be Missing

OpenText’s latest results reveal growth beneath falling revenue, with its AI opportunity depending on turning customer demand into stronger earnings.

Read more »

heavy construction machines needed for infrastructure buildout
Investing

2 Canadian Stocks I’d Buy and Hold in My TFSA for the Long Run

These TSX stocks stand out because of their strong fundamentals, ability to sustain profitable growth, and resilience.

Read more »

copper wire factory
Stocks for Beginners

Ivanhoe Sits on 43,000 Tonnes of Unsold Copper as Prices Stay High: Is the Stock a Buy?

Ivanhoe holds 43,000 tonnes of unsold copper at Kamoa-Kakula. Does this make the miner a buy for your portfolio right…

Read more »

running robot changes direction
Tech Stocks

Lightspeed Stock Drops 14% After Earnings: Here’s Why I’d Buy the Dip

Dax Dasilva explains how better customer deals and AI that tackles merchants’ daily chores could strengthen Lightspeed’s recovery.

Read more »

gift is bigger than the other
Tech Stocks

Holiday Test Ahead: Shopify Forecasts Another 30%-Plus Quarter as Shoppers Gear Up

Shopify forecasts another quarter of 30%-plus revenue growth. Here’s what its holiday outlook means for investors, and which results to…

Read more »

man in suit looks at a computer with an anxious expression
Dividend Stocks

Dividend Income in a TFSA: Why I Love This Tax-Free Setup

If you don't like paying tax on your passive income, use this tax-free set up in your TFSA to generate…

Read more »