Monday’s TSX breakouts: This dividend stock hits a record high despite recent market weakness

On today’s TSX Breakouts report, there are 19 stocks on the positive breakouts list (stocks with positive price momentum), and 35 stocks are on the negative breakouts list (stocks with negative price momentum).

We last featured the stock discussed today 11 months ago when it was on the negative breakouts list.

Since then, the share price has made a U-turn with the stock price closing at a record high on Friday. The stock is now on the positive breakouts list and analysts believe the positive price momentum will steadily continue with modest returns expected. The stock is currently trading at a reasonable valuation, in-line with its historical averages; however, the multiple has room to expand as operational milestones are reached.

Given the 11-per-cent move in the share price over the past two trading sessions, the share price may soon pause in order to digest these rapid gains. The company discussed today is Empire Company Ltd. (EMP.A-T).

A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Headquartered in Stellarton, N.S., Empire is a leading food retailer with more than 1,500 grocery stores located across the country under banners that include Sobeys, Safeway, IGA, FreshCo, Foodland, Thrifty Foods, and Farm Boy. The company has two main reporting segments, food retailing, and investments and other operations, which includes its investment in Crombie REIT (CRR-UN-T).

The eat-at-home trend is benefiting Empire.

Before the market opened on Sept. 10, the company reported its first-quarter fiscal 2021 financial results (the company’s 2020 fiscal year-end was May 2). Adjusted earnings per share came in at 71 cents, ahead of the consensus estimate of 58 cents, marking the highest quarterly earnings in the company’s history. Same-store sale growth (excluding fuel) increased 11 per cent. EBITDA (earnings before interest, taxes, depreciation and amortization) was $582-million, surpassing the Street’s forecast of $502-million. The EBITDA margin was 7.9 per cent in the quarter, up from 6.8 per cent reported last year. The share price rallied 4 per cent that day, and a further 6.7 per cent the following trading day.

In the earnings release, management highlighted its “Project Horizon” initiative with the goal of delivering an additional $500-million in annualized EBITDA by the end of fiscal 2023 through market share gains and cost efficiencies.

“In fiscal 2021, capital spending is expected to be between $650-million and $675-million with approximately half of this investment allocated to renovations [renovating roughly 30 per cent of its store base] and new stores. The company will open 10 to 15 FreshCo stores in western Canada and expand the Farm Boy footprint by eight stores in Ontario. The company will also invest approximately 15 per cent of its estimated spending on advanced analytics technology and other technology systems. The company’s total investment in Voilà [its online grocery home delivery service that was launched in Ontario in June] for fiscal 2021, including its share of the investment in the Montréal customer fulfilment centre [that will service the Montreal and Ottawa regions], is approximately $65-million.”

Management plans to open two additional Voilà customer fulfilment centres, bringing its total to four.

Returning capital to its shareholders

Empire pays its shareholders a quarterly dividend of 13 cents per share, or 52 cents per share yearly. This equates to a current annualized yield of 1.4 per cent.

Management is firmly committed to returning capital to its shareholders. Since 2011, the company has announced a dividend hike in June of each year. Most recently, in June 2020, the company announced an 8 per cent dividend increase, raising its quarterly dividend to its current level of 13 cents per share from 12 cents per share.

During the first quarter of fiscal 2021, the company did not repurchase any shares.

Analysts' recommendations

This mid-cap stock with a market capitalization of $10.2-billion is actively covered by nine analysts, of which eight analysts have buy recommendations, and one analyst (Irene Nattel from RBC Dominion Securities) has a “sector perform” recommendation.

The firms providing recent research coverage on the company are as follows in alphabetical order: Barclays, BMO Nesbitt Burns, CIBC World Markets, Desjardins Securities, National Bank Financial, RBC Dominion Securities, Scotia Capital, TD Securities and Veritas Investment Research.

Revised recommendations

After the company reported better-than-expected quarterly earnings results last week, seven of the nine analysts revised their expectations higher while two analysts left their target prices unchanged.

• TD’s Mike Van Aelst upgraded his recommendation to a “buy” from a “hold” and raised his target price to $43 from $37.
• Vishal Shreedhar at National Bank lifted his target price by $3 to $42.
• Veritas' Kathleen Wong increased her target price by $3 to $38.
• BMO’s Peter Sklar hiked his target by $2 to $41.
• CIBC’s Mark Petrie increased his target price to $42 from $40.
• Scotia’s Patricia Baker raised her target price to $45 (the high on the Street) from $44.
• Desjardins' Chris Li lifted his target price by $1 to $39.

Financial forecasts

The Street is forecasting earnings per share of $2.44 in fiscal 2021, up 11 per cent from adjusted earnings per share of $2.20 reported in fiscal 2020. Earnings per share is expected to climb to $2.65 in fiscal 2022.

Expectations increased after the company reported an earnings beat. For instance, three months ago, the Street was forecasting earnings per share of $2.27 in fiscal 2021 and $2.38 in fiscal 2022.

Valuation

The stock is commonly valued on a sum-of-the-parts basis, individually evaluating the different business segments of the company’s operations.

The stock appears to be trading at a reasonable valuation relative to historical levels with room to expand as management’s stated objectives are attained. Shares of Empire are currently trading at a price-to-earnings multiple of 14.3 times the fiscal 2022 consensus estimate, in-line with its three-year historical average forward P/E multiple of 14.2 times and below its peak multiple of over 16 times. On an enterprise value-to-EBITDA basis, the stock is trading at 7.7 times the fiscal 2022 consensus estimate, slightly above the three-year historical average of 7.3 times.

In comparison, shares of Loblaw Companies Ltd. are trading at a P/E multiple of 14 times the calendar 2021 consensus estimate. Shares of Metro Inc. are trading at a P/E multiple of 17.5 times the fiscal 2021 consensus estimate.

The average one-year target price is $41.56, implying Empire’s share price may increase nearly 10 per cent over the next 12 months. Individual price targets are as follows in numerical order: $38 (from Veritas’ Kathleen Wong), $39, $40, $41, two at $42, $43, $44, and $45 (from Scotia’s Patricia Baker).

Insider transaction history

In the second half of this calendar year, only one insider has reported a transaction in the public market.

On July 29, Vivek Sood, executive vice-president – related businesses for Sobeys Inc., exercised his options, receiving 4,760 shares (the exercise price was not disclosed), and sold 4,760 shares at an average price per share of approximately $33.64, eliminating his position in this specific account.

Chart watch

On Friday, the share price soared nearly 7 per cent on high volume, closing at a record high. That day over 1.7-million shares traded, well above its three-month historical average of approximately 800,000 shares.

Year-to-date, this is the second best performing stock in the S&P/TSX composite consumer staples sector index (Jamieson Wellness Inc. is the top performing stock).

Empire’s share price is up 24 per cent year-to-date outperforming its industry peers, Loblaw Companies Ltd. (L-T) and Metro Inc. (MRU-T), whose share prices are up 2 per cent and 13 per cent, respectively.

Looking at key technical resistance and support levels, the stock has a major ceiling of resistance is around $40. Looking at the downside, there is initial technical support around $35. Failing that, there is technical support between $30 and $32, close to its 200-day moving average (at $31.85).

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Breakout stocks on the TSX

Source: Bloomberg

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