Pat McKeough responds to many personal questions about buying stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.
This week, an Inner Circle member asked about Empire Company, a stock that makes money from a variety of sources, including movie theatres. But its chief source of revenue is grocery chain Sobeys. Pat considers the reliable income generated by Sobeys’ stores against the threat of increased competition as more big-box retailers crowd into the grocery business.
Q: Hi: I have recently taken a small position in Empire Company. What do you think of their shares? Thank you.
A: Empire Company Ltd., (symbol EMP.A on Toronto; www.empireco.ca), is a diversified Canadian firm based in Stellarton, Nova Scotia.
Empire sells and distributes food through national grocery retailer Sobeys. It also operates movie theatres and invests in real estate and various publicly traded companies.
In June 2007, Empire paid $1.06 billion for the 29.9% of Sobeys that it did not already own. (Sobeys was a recommendation of our Successful Investor newsletter. We first recommended the stock in April 2003 at $36, so the buyout left our subscribers with a gain of 61.1%.)
Sobeys owns or franchises about 1,500 stores across Canada under banners such as Sobeys, IGA, IGA Extra and Price Chopper. Sobeys’ shares were delisted from Toronto shortly after the purchase, in June 2007.
The grocery-store operator accounts for over 98% of Empire’s revenue. However, food retailing is a high-volume, low-margin business, so Sobeys generates just 89% of Empire’s earnings.
The company’s real estate division includes commercial and residential property operations. It owns 44.6% of Crombie REIT (symbol CRR.UN on Toronto), which invests in retail, office and mixed-use properties. Empire handles its residential investments through a 40.7% interest in Genstar Development Partnership.
Empire Theatres is the second-largest movie theatre operator in Canada. The division owns or has interests in 53 theatres with 438 screens across the country.
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Revenue and earnings both rose in most recent quarter
The company also holds stocks that trade on Toronto and New York. Including its holdings in Crombie REIT and Genstar, Empire’s investment portfolio had a market value of $743.8 million, or $10.95 a share, on November 3, 2012.
In its 2013 second quarter, which ended November 3, 2012, Empire’s revenue rose 9.1%, to $4.4 billion from $4.0 billion a year earlier. Excluding one-time items, earnings rose 14.4%, to $85.7 million, or $1.26 a share. A year earlier, it earned $74.9 million, or $1.10 a share.
Empire’s long-term debt of $893.3 million is a reasonable 22% of its market cap. It also holds cash of $389.9 million, or $5.73 a share.
The company pays a quarterly dividend of $0.24 a share, for a 1.6% yield. The stock trades at 11.3 times the $5.22 a share that Empire will probably earn in fiscal 2013.
In the Inner Circle Q&A, Pat balances the benefits of steady cash flow from Sobeys against the increased competition in food retailing from U.S. big-box store as well as the added risk of having two-thirds of Sobeys’ stores in Atlantic Canada and Quebec. He concludes with his clear buy-hold-sell advice on the stock.
COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members
On the whole, do you believe the profusion of big-box stores has been a plus or minus for consumers and local economies? What is your opinion of them as investments? Let us know what you think.
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