From atechnical analysis standpoint, the chart of
excites me. First,shares of the second-largest U.S. grocery-store
chain have just broken amajor downtrend line that dates back almost
two years. Second, they have completed a rounding bottom base
formed during roughly the past nine months and appear to be headed
higher. With an upbeatrevenue andearnings outlook, plus a
healthydividend , thestock looks attractive.
The California-based grocery store -- which operates about 1,700
locations across the United States and western Canada, and holds a
49% interest in food and general merchandise retailer Casa Ley,
which has 185 outlets in northwestern Mexico -- seems to be on the
rise for three reasons:
1. Increased focus on customer loyalty programs;
2. Divesting of key assets; and
3. A shift in upper management.
The company's "just for U" loyalty program helps shoppers savemoney
with digital coupons and personalized specials. In fact, members
can save up to 20% on groceries just by being part of the program.
Members receive deals specifically tailored to them, based on
products they frequently purchase.
In the most recently reported third quarter, management said the
"just for U" program helped the company improve sales volumes. As
more customers join, sales in the upcomingquarters should be
stronger. According toCEO Steve Burd, management expects to see
fourth-quartersame-store sales growth driven by increased "just for
Safeway is also rolling out a fuel loyalty program in
Exxon Mobil (
. As a bonus to loyal shoppers, customers who buy groceries at
Safewaywill be able to receive gas discounts at Exxon gas stations
in the Mid-Atlantic states.
The company is also looking at divesting or spinning off some
assets. According to recent reports, Safeway may sell off its
Canadian stores. There are currently about 200 Safeway stores
across western Canada. In 2011, these stores generated $6.7 billion
in revenue. There are rumors Canada's third-largest supermarket
chain, Metro, may bid to acquire Safeway Canada.
Safeway also intends to spin off its most profitable division,
its minority stake in Blackhawk Network Holdings. The holding
companyissues pre-paid gift cards for restaurants, retail stores
and food outlets. In 2011, Blackhawk's revenue was about $100
million. It's expected the spin-off will be completed by mid-2013.
Theseasset sales should raise a huge amount ofcash , which Safeway
can plow back into making its core assets more profitable.
In conjunction with asset sales, the company is bringing in new
management. Safeway just announced that Peter J. Bocian will be the
company's new executive vice president and chief financial officer.
Bocian formerly worked at financial services company,
JPMorgan Chase (
Additionally, after 20 years at the helm, current CEO Steve Burd
announced his retirement plans for May of this year. A new CEO,
flush with cash from asset sales, could take the company in new,
As the chart of Safeway stock below shows, shareholders seem
optimistic about the stock's future.
This Feb. 11 trading week, shares bullishly broke a major
downtrend line that has been forming since the stock's May 2011
At the same time, shares have emerged out of a rounding bottom
basing pattern. The top of the base is marked by the February 2012
high of $22.32. The low point of the base is marked by the stock's
near twice tested bottom, as shares hit a low of $14.43 in July,
and then flirted with this low point again in October.
Since hitting the second low in October, shares have been on the
rise, and a steep uptrend line has formed. In early 2013, the
10-weekmoving average (blue line) bullishly crossed above the
40-week moving average (red line) -- a highlybullish event. Soon
after, the stock challenged important historical resistance, near
$19.17, which dates back to late 2010.
Having now broken the major downtrend line, shares appear to be
moving toward the completion of a second basing pattern, with
resistance at $22.38. If $22.38 can be exceeded, according to
themeasuring principle for a basing pattern -- taken by adding the
height of the pattern to the breakout level -- shares could
potentially reach a high of $30.33 ($22.38-$14.43 = $7.95;
$7.95+$22.38 = $30.33). Based on the stock's current price, this
target represents potential gains of almost 50%.
The bullish technicals are backed by a strong fundamental
outlook. On Thursday, Feb. 21, Safeway is scheduled to report
fourth-quarter and full-year 2012 results. For the full 2012
year,analysts project the company's partner fuel program will
causerevenues to increase 1.1% to $44.09 billion, from $43.63
billion last year.
In the first quarter of 2013, analysts expect revenue will rise
1.4% to $10.14 billion, compared with $10 billion in the
The earnings outlook is far more positive. Due to growth from
the company's expanding loyalty programs, analysts expect
fourth-quarter earnings will increase 12% to $0.76, from $0.67 per
share in the year-ago period. For the full 2012 year, analysts
project earnings will rise 12% to $2.01, from $1.78 per share last
In the first quarter of 2013, analysts expect increased demand,
due to the customer loyalty program, will help push up earnings 13%
to $0.34 from $0.30 per share in the comparable year-ago
In addition to a solid fundamental outlook, the company is
attractively valued based on its low trailing price-to-earnings
(P/E ) ratio of about 9.9. Based on this ratio, the company'sPEG
(P/E divided by growth rate) is low at about 0.9. Typically, a PEG
of 1 or less shows attractive valuation. The company also has a
very low price-to-sales ratio of about 0.11. In comparison, the
industry average for major grocery stores is about 0.36.
SWY offers an attractive forward annualdividend yield of about
3.4%. Management has consistently raised the dividend every year
since 2005, and with increasing earnings should be able to do so in
Risks to consider:
With big-box retailers like Wal-Mart (
)offering increased fresh food selections, Safeway is facing
growing competition. However, the company is implementing more
loyalty programs to reward customers for their commitment. These
programs should help retain customers and contribute to future
Action to Take -->
Buy SWY at themarket price . Set stop-loss at $17.78, slightly
below support of the current uptrend line. Set initialprice target
at $30.33 for a potential 49% gain by late 2013.
This article originally appeared on ProfitableTrading.com:
Chart Pattern Predicts This Stock Could Rise 49% by