SWY Market Research & Analysis Report
Updated Jun 4, 2014

Growth and Balance Sheet

The company reported net loss of $76.5 million, or 34 cents diluted loss per share, for the first quarter of 2014 ending March 22. That's down from a net income of $118.9 million, or 49 cents diluted earnings per share for the same quarter last year. The decrease was primarily due to loss on foreign currency translation of $153.1 million, and due to inflation in produce, meat and pharmacy that was not fully passed along for competitive reasons. Revenues for the first quarter were $8,261 million, up from $8,177 million for the same quarter last year. Identical store sales (excluding fuel) was up 1.8% in comparison to the same quarter last year, consisting of 1% increase in price and 0.8% increase in volume. The company operated 1,332 stores at the end of the quarter. Fuel sales totaled $877 million, down from $959 million in the same quarter last year. The company operated a total of 351 fuel stations at the end of the period, up from 343 stations at the end of the first quarter last year. Gross profit margin for the quarter was 26.15%, down from 26.49% for the same quarter last year, primarily due to strong cost inflation in produce, meat and pharmacy. Operating profit margin for the quarter was 0.66% down from 1.40% for the same period last year, primarily due to increased store occupancy and merger-related expenses. Net cash used in operating activities – continuing operations for the first quarter was $795 million, compared to $584 million for the first quarter of the previous year. Free cash flow for the first quarter was -$431.3 million, compared to -$39.8 million for the same period last year. SWY forecasted second quarter EPS of 2014 are expected to be from 15 cents to 32 cent, compared to actual EPS of 4 cents for the second quarter of 2013. The financial strength indicators of the company are at satisfactory levels. Company’s current ratio is 1.61 and the industry average is 1.09. Also, the quick ratio of 1.02 is better than the industry average of 0.90. The interest coverage ratio of 2.42 is lagging behind the industry average of 298.3. In terms of efficiency, the asset turnover ratio of 2.46 is better than the industry average of 1.41; the inventory turnover ratio of 10.26 is lagging behind the industry average of 18.43; and the ROE of 2.36% is lagging behind the industry average of 20.50%. 

Valuation

SWY PE stands at 2.52 below the industry average of 24.05, and below the stock market average represented by the S&P 500 average of 19.20. The company is currently trading below the maximum P/E ratio of 15x, and over the last five years, the company’s shares have traded in the range of 1.90x to 17.36x trailing 12-month earnings. SWY's current Price/Sales of 0.22 is below the average of its industry of 0.44. SWY’s head to head comparison to its main competitors shows that the company has the highest gross margin, and one that is above the industry average. However, the operating margin is the lowest result when compared to the selected competitors’ achieved margins, and it is below the industry average. The quarterly revenue growth of the company is average result when compared to the selected peers, and it is well below the industry average. SWY trades at the lowest P/E ratio when compared to the selected peers, and also at the lowest P/S ratio. SWY’s twelve trailing months EBITDA is $1.52 billion, above the average industry EBITDA of $1.16 billion. The stock is currently trading below its intrinsic value of $38.91, this suggests that the stock is currently undervalued at these levels. The beta of 0.89 implies lower volatility of the stock with respect to the S&P 500. SWY has shown favorable earnings consistency over the last five years. Moreover, the company earnings have increased by 40.14% over the last five years. The current quarter earnings in comparison to the same quarter last year have decreased by 131%. SWY’s Total Debt/Equity of 77.21 is above the required maximum, and it is above the industry average of 69.4. SWY’s current price levels are below the maximum level, 4.77% below the 52 week high of $36.03, and the technical analysis give neutral to positive view of the stock. The majority of the analyst ratings are hold. SWY has a dividend payout ratio of 6% and trailing annual dividend yield of 2.10%. 

About SWY

Safeway Inc. (Safeway) is a food and drug retailer in North America. In support of its retail operations, the Company has a network of distribution, manufacturing and food-processing facilities. Safeway owns and operates GroceryWorks.com Operating Company, LLC (GroceryWorks), an online grocery channel doing business under the names Safeway.com and Vons.com (collectively Safeway.com). Safeway also has a 49% interest in Casa Ley, S.A. de C.V. (Casa Ley), which operates 195 food and general merchandise stores in Western Mexico. Blackhawk Network, Inc. (Blackhawk), a subsidiary of Safeway, provides gift cards, prepaid products and payment services to consumers through a network of retail store locations and various online channels. In February 2014, Whole Foods Market Inc acquired leases from Safeway Inc for seven locations formerly operated as Dominick's stores. In April 2014, Safeway Inc completed the sale of its Class B Common shares in Blackhawk Network Holdings Inc.

Competitor Comparison

Safeway Inc. N.V.

Highlights

Safeway Inc. operates as a food and drug retailer in the United States. The stock closed yesterday’s trading session at $34.31. In the past year, the stock has hit a 52-week low of $19.93 and 52-week high of $36.03. The intrinsic value of the stock is above the current price. SWY has a market cap of $7.82 billion and is part of the Services sector.

• Strong manufacturing and distribution capabilities         
• Product in line with the ‘eating at home’ trend
• Specialty departments facilitate increased footfall and differentiation   

• Overcharging customers hurts consumer confidence

SWY Intrinsic Value

Stock Valuation Model & Intrinsic Value Definitions

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. SWY's 52 week high is $36.03, current price is $34.31, is 4.77% below the 52 week high.

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. The company has a P/E ratio of 2.52 the average industry P/E ratio is 24.05 and is below the S&P 500 P/E ratio of 19.20.

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders. Insiders own 0.89 % of SWY stock. Management's representation is not large enough. This does not satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

SWY is trading in the range of $34.06 - $34.46 in the past 30 days. The stock has been showing support around the level of $27 and resistance in the $36 range. The stock is trading close to the 50-Day Moving Average and below the 200-Day Moving Average. The RSI(14) is 55.18. From June 2013 to End of October 2013 the stock was slowly but steadily rising. The following 3 months, until February, the stock plummeted to around $26.90 where it found support. Afterwards, it quickly rose to $36, surpassing the 2007 resistance at around $32. Currently the stock is in a consolidating phase, trading in a narrow range, not going really anywhere. A move in either direction will decide the short term course. Our indicators give a neutral to positive view of SWY.

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Investor’s sentiment for the stock.

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com is 1 Buy, 1 Outperform, and 13 Hold.

We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. SWY’s annual EPS for the last 5 years were -2.66, 1.55, 1.49, 2.40 and 14.38 this type of earnings action is favorable.

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry. SWY’s Total Debt/Equity of 77.21 is above the required maximum, and it is above the industry average of 69.4.

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. SWY’s EPS growth for this quarter relative to the same quarter a year earlier is -131%, below our target.

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. SWY’s annual earnings growth rate over the past five years is 40.14%, above our target.

¹Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.