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What to do with the securities of Empire/IGA, Power Corporation and SNC-Lavalin? Here are some recommendations from analysts likely to move prices soon. Note: the author may have a totally different opinion from that expressed by the analysts.
Empire/IGA (EMP.A, $34.16): the title is cheap, but more patience is required
The owner of IGA grocery stores in Quebec fought several head-on battles in the third quarter that weakened its results. Chris Li of Desjardins Capital Markets remains hopeful that once the headwinds dissipate, the benefits of the group’s recovery plan should resurface.
Food inflation that drives customers to competitors’ discount grocery stores, high investments in its online ordering infrastructure, in addition to high cyber attack costs that produced a disappointing quarter.
The Desjardins analyst recalls that only 10 to 15% of the group’s grocery stores are discount brands compared to a proportion of 60% for Loblaw (L, $116.06) and 40% for Metro (MRU, 69, $95).
Same-store sales were flat as Chris Li had forecast a slight 0.5% rise and consensus had hoped for a 2% increase.
Online sales fell 15% because a year earlier the pandemic lockdown had inflated orders.
Sales of the online grocery service Voilà nevertheless increased by 9% compared to the second quarter. The integration of the online activities of the Toronto chain Lungo’s into Voilà in July should improve the efficiency of this service in the Greater Toronto Area.
Ultimately, the grocery business’ operating profit of $525 million missed the analyst’s target of $552 million, largely due to a 30 percentage point decline in gross margin.
Empire has therefore lowered its own earnings per share growth targets from 15% to 13%, for the three-year period ending in 2023.
This revision means Empire’s stock is trading at a multiple of 12.4 times the new $2.75 per share earnings expected in 2023, a valuation that Chris Li considers cheap because the stimulus package has not not finished reporting.
Despite everything, the analyst recognizes that the grocer will need a helping hand from food inflation in order to improve the results and investors’ perception of the stock.
That helping hand won’t show up until the second half, at the earliest. “Investors will have to be more patient,” says the analyst.
If food inflation moderates from the second half of the year, a 9% growth in earnings per share to $3.01 in 2024 is possible, he foresees
A multiple of 13 to 14 times this expected profit takes its target price from $44 to $41, representing a potential rebound of 20%.
Chris Li says he is “cautiously positive” and renews his buy recommendation.