Analysts Remain Optimistic On Safeway Amidst Mixed 4Q Results And Possible Sale Discussion

Analysts respond following Safeway's SWY fourth quarter 2013 results on Wednesday. Fourth Quarter Results and Announcements Safeway reported fourth quarter EPS of $0.35 versus the estimated $0.48, missing by $0.13. EPS were down 34% from the same quarter last year. Revenue came in at $11.31 billion versus the estimated $11.48 billion. Sales were down 18% year-over-year. Management expects FY2014 EPS to be within $1.15-1.35 versus the $1.69 analyst estimate. Safeway announced that it is in discussions to potentially sell the entire company. The company also plans to spin Blackhawk to shareholders and seeks to monetize its 49% interest in Mexican JV Casa Ley. Analysts Respond to Possible Sale and Management's Comments On Thursday, Jefferies analyst Mark Wiltamuth focused on Safeway's announcement of buyout discussions. According to Jefferies research, Wiltamuth forecasts that valuations up to 7.0x EV/ EBITDA are possible. In addition to the Blackhawk spin-off, the analyst remarked that valuation of Safeway could reach $47.00 per share. The sale of Casa Lay could net another $300 million. Jefferies commented, "Safeway ended the quarter with $4.2B in debt and $2.9B in adjusted cash (after removing Blackhawk seasonal cash and $1.2B in tax payments pending on Canada sale). If a buyout does not occur, the company plans to retire $1.5B in debt and apply $1.4B to share repurchase. Under this scenario, we believe investors would continue to value SWY below KR shares." Wiltamuth has a Hold rating on Safeway with a $35.00 price target. Analyst Kelly Bania from BMO Capital Markets maintained her Outperform rating on Safeway and raised the price target from $38.00 to $40.00. Bania applauded the company on continuing to evolve its operational approach and its evaluation of options under business review. BMO Capital Markets noted "strategic review updates" by Safeway including, "Given the possibility of a sale of the company, Safeway halted its previous plans to execute a large-scale share buyback and debt-paydown late in 4Q13 – executing just $663MM of its planned ~$2.2Bn share buyback (leaving $1.4Bn remaining) and paying down just $500MM of its planned ~$2Bn debt pay-down (leaving $1.5Bn remaining). This has resulted in lower EPS estimates but relatively unchanged EBITDA forecasts for 2014/15E." Deutsche Bank analyst Karen Short remarked that Safeway's fourth quarter results were "respectable" and implies a stable underlying business. The analyst wrote that she "applaud SWY management for their efforts to create value within the framework of their own portfolio." Short added, "In the event of a sale, we think it would be shortsighted to assume there is only one bidder (Cerberus) for Safeway given SWY's extremely attractive and valuable real estate, and strong brand equity and market share in the Pacific Northwest and California. In fact, as we detailed in a report published in April 2012, we believe a KR/SWY combination would be extremely compelling for both parties – albeit with more divestitures if Kroger were the acquirer given Kroger's more significant overlap." Deutsche Bank maintains a Buy rating with a $40.00 price target on Safeway. Shares of Safeway closed at $34.61 on Wednesday and are currently trading up 1.62% at $35.17.