# Canadian Grocers (EMP.A, L, MRU)



## AnonymouslyInvesting (Nov 29, 2016)

It is the season for harvesting tax losses, which can present significant opportunities to pick up stocks at a discount to their historical valuations that have had a rough year. I read a note on Friday that posed some ideas to do just that. One of the stocks on the list was Empire Company Ltd. (EMP.A). The company is down over 28% this year, while their competitors, Loblaws (L) and Metro (MRU), are up 9% and 5% respectively. 

The main issue with EMP.A is the difficulty they are having with the Safeway acquisition. Their most recent quarter saw sales down marginally, but earnings were down $43.4M, or 40%! Much of that has been cost issues, but they are also losing market share to other grocers, mainly L and MRU, but also Costco and Wallmart. These are troubling trends. After the steep decline in Empire’s share price, it may be tempting to jump in. However, I went back to January 1, 1999 and looked at their Price to Trailing Twelve Month Earnings per Share (P/TTM EPS). They are currently trading just above their long-term average of ~13.5 times TTM EPS. Reasonable…but not exactly cheap for a company plagued with so many problems. 

I did the same analysis on Loblaws and Metro. MRU has outperformed L by about 20% (total return) over the past three years. Some of the reasons for the outperformance is that MRU is more of a pure play in the grocery space, whereas L has their financial division and acquired Shoppers Drug Mart in 2013 for $12.4B. Metro has also done a spectacular job of passing along food price inflation (this is good for grocers, food deflation is bad for them) and have been increasing their promotional discounted brands. The latter has contributed to their gain in market share which has outweighed the squeeze in profit margins. 

Looking at their valuations, MRU has been trading at a large premium (~19x) to their historical average (~14x) P/TTM EPS. In fact, they’ve even been trading at a premium to +1 standard deviation (~16.75) above the historical average. The recent pullback in the shares has brought this multiple to about 17x. The chart does look like the shares are making a double bottom, but I would stay rather cautious going forward.

On the other hand, Loblaws is trading at a discount (~18x) to their historical average (~20x) P/TTM EPS. Given that Loblaws is a much more diversified company, this would be my preferred buy in the space. In addition, Shoppers has applied for a licence to sell medical marijuana, which could provide significant upside in profits. My preference would still stand even without this application, but it does, in a way, provide a call option on marijuana regulation. 

To conclude, yes Empire has underperformed by a wide margin this year. However, I don’t believe that this justifies entry at this time considering they are still struggling with operations, market share and their valuation still isn’t compelling. Metro is performing extremely well but margins are being squeezed and they are still relatively expensive. If the USD appreciates vs. CAD (which I’m expecting over the next year) it will be a tailwind for price inflation and profits, you could still enter the stock here. However, my preferred name is Loblaws given their relatively cheap valuation, the aforementioned tailwind, and their more diversified operations. 

What are your thoughts on the space and/or the companies?


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## dubmac (Jan 9, 2011)

AnonymouslyInvesting said:


> What are your thoughts on the space and/or the companies?


I am watching XST & it is gradually coming down - but not likely to drop much IMO. 
74% is food retail, 20% packaged food and meat. L, MRU, SAP and ATB are all in there. only 4% EMP.A


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## dubmac (Jan 9, 2011)

EMP.A dropping. 1 yr low.
http://www.bramptonguardian.com/news-story/7021574-empire-profit-falls-by-more-than-50-/


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