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.

| More on:
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.

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 Will Ashworth has no position in any stocks mentioned.

More on Investing

growing plant shoots on stacked coins
Dividend Stocks

4 Ways to Grow $100,000 Into $1 Million in Retirement Savings

Anyone can build a million-dollar retirement portfolio. Here are four ways you could practically grow $100,000 to $1 million.

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Steer Clear: This Stock Spells Trouble

A newly listed cannabis stock is outperforming in 2024 but investors should stay clear to avoid trouble and losses.

Read more »

Red siren flashing
Energy Stocks

Buy Alert: 4 Reasons Why TC Energy Stock Is a Must-Own Now

A large-cap energy stock is a strong buy today for four compelling reasons.

Read more »

Shopping and e-commerce
Tech Stocks

Is Lightspeed Commerce Stock a Buy Now?

Despite the near-term weakness, I am bullish on Lightspeed due to its solid fundamentals, healthy growth prospects, and attractive valuation.

Read more »

A shopper makes purchases from an online store.
Dividend Stocks

3 Reasons to Buy TFI Stock Like There’s No Tomorrow

TFI stock (TSX:TFII) had a hard 2023, but now it's set up for a solid 2024, with an acquisition that…

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

5 Secrets of TFSA Millionaires

These lesser-known secrets can help you set up the perfect long-term portfolio and achieve a million-dollar TFSA!

Read more »

Canadian stocks are rising
Dividend Stocks

iShares S&P/TSX Capped REIT Index ETF (TSX:XRE): Why I Like this ETF Better Than a Rental Property

XRE is a great ETF for gaining exposure to the Canadian real estate sector.

Read more »

analyze data
Dividend Stocks

How to Build a Powerful Passive-Income Portfolio With Just $20,000

These fundamentally strong TSX stocks have paid and increased their dividend in all market conditions. Add these stocks to build…

Read more »