Empire Company: A Retail Empire Built on Solid Ground?

Empire company is a TSX stock trading at an attractive multiple. It also offers you exposure to a recession-resistant sector.

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Investing in quality mid-cap companies offers you the potential to derive inflation-beating returns consistently over time. Typically, a mid-cap stock is one which is valued between the market caps of $2 billion and $10 billion.

Mid-cap companies are perfect for those looking for a combination of growth and profitability. Also, it’s advisable for investors to diversify their equity portfolios and hold companies of all sizes and across sectors, lowering overall risk.

One such mid-cap TSX stock is Empire Co. (TSX:EMP.A) operating in the retail sector. Valued at a market cap of more than $9 billion, Empire generated $30.8 billion in sales in the last four quarters.

With $16.4 billion in assets, the TSX company also pays investors an annual dividend of $0.66 per share, translating to a forward yield of 1.9%.

Is Empire stock a buy, sell, or a hold?

Empire’s primary business is food retailing through its wholly owned subsidiary Sobeys Inc, while it also operates in the related real estate sector. The company owns and franchises retail stores under multiple banners, such as Thrifty Foods, Farm Boy, FreshCo, and Longo’s.

With more than 1,600 stores in all 10 Canadian provinces, Empire is a retail giant. Moreover, it owns an interest in the Crombie REIT (real estate investment trust), which is armed with a wide portfolio of grocery and pharmacy-anchored shopping centers, freestanding stores, and mixed-use developments.

Empire has almost doubled its revenue from $16.2 billion in fiscal 2012 (ended in April). In the last 10 years, its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) has increased from $856 million to $2.3 billion, which suggests its margins have widened from 5.3% in 2012 to 7.7% in 2022.

Despite disruptions arising from COVID-19, Empire managed to expand its adjusted earnings at an annual rate of 18.5% in the last five years.

In Q1 of fiscal 2021, Empire launched Project Horizon, a three-year strategy with a focus on core business expansion and the acceleration of e-commerce. The execution of this project targets growing Empire’s market share and building on cost discipline despite elevated inflation levels.

This will allow Empire to achieve an incremental $500 million in annualized EBITDA in fiscal 2023. According to Project Horizon’s three-year timeframe, Empire aims to grow earnings by 13% and increase its EBITDA margin by 50 basis points.

What next for Empire stock price and investors?

Empire believes a combination of new store additions, improvement in store operations backed by data analytics, and continued efficiencies gained by strategic sourcing should positively impact revenue and profits.

Priced at 0.30 times sales and 12.9 times forward earnings, Empire stock is very cheap. But it is also a slow-moving giant with low-profit margins.

In the last 20 years, the TSX stock has returned 508% to shareholders after adjusting for dividends. Comparatively, the TSX Index has gained 433% since May 2003.

While Empire’s dividend yield is not too attractive, these payouts have risen by 10% annually in the last two decades, showcasing the resiliency of its business model. Analysts remain bullish on Empire stock and expect it to gain 14.5% in the next 12 months.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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