The shares of grocery store chain Safeway Inc. (SWY), first discussed here on February 20, 2009, at a price of $20.09, have pulled backed toward $20 after testing $24 last autumn, but I still like the shares at this juncture. Here's why:
Intense competition will pressure grocery prices, hurting Safeway's revenue, but the view from here argues the worst is over concerning store traffic in California, a major market for SWY.
Meanwhile, margins should increase slightly in 2011, aided by an improved product mix.
Longer-term, Safeway's model is dependent on household formation growth: if job growth resumes, store traffic will begin to normalize, although per customer sales will likely remain challenged, as the U.S.'s frugal consumer trend continues.
Safeway operates about 1,725 stores, primarily in California, Oregon, Washington state, Alaska, Colorado, Arizona, Texas, Chicago, Illinois, and the Mid-Atlantic U.S. The company also operates food distribution/processing and a manufacturing network to support its stores.
The Thomson Reuters First Call FY2011 EPS estimate for SWY is $1.70, which looks about 5% low, according to my analysis.
Technically, as noted, Safeway has retreated about 15% since testing $24, but the calculation here is that SWY should hold psychological support at $20.
2011 Outlook: I view Safeway as a long-term play, but if you're looking to sell SWY within the year, it's probably best to take your profits after it rises to $24 or $25, if it fails to rise above $26.
Stock Analysis: I consider Safeway Inc. to be a moderate-risk stock. If an investor has already purchased the company's shares, I'd hold them. If not, and I liked the stock enough to buy, I'd consider buying a 25% position in SWY now; then buy another 25% in one month, if U.S. economic conditions don't worsen substantially. Under any circumstance, I wouldn't buy more than 75% of my SWY position before March 2011, and I'd put a sell/stop loss at $14.25.
Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.