Is Safeway a Buy After Recent News?

With shares of Safeway (NYSE:SWY) trading around $33, is SWY an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Safeway is a food and drug retailer in North America that operates over 1600 stores. The company’s United States retail operations are located principally in California, Hawaii, Oregon, Washington, Alaska, Colorado, Arizona, Texas, the Chicago metropolitan area, and the Mid-Atlantic region. In support of its retail operations, Safeway has a network of distribution, manufacturing, and food processing facilities. Safeway also owns and operates GroceryWorks.com, an online grocery channel doing business under the names Safeway.com and Vons.com. Safeway also has a 49 percent interest in Casa Ley, S.A. de C.V., which operates 195 food and general merchandise stores in Western Mexico.

Safeway shares are up despite the fact that the grocery store chain reported a 59 percent drop in profit for the third quarter. The reason for the Safeway optimism is that the company announced it’s leaving Chicago by the beginning of next year. The 72 Domenick’s supermarkets it owns in the city will give Safeway a $400 to $450 million cash tax benefit. Revenue grew 1.1 percent to $8.6 billion, but earnings fell short of estimates at 10 cents a share.

T = Technicals on the Stock Chart Are Strong

Safeway stock has been surging higher over the last several months. The stock is currently trading near highs for the year and looks set to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Safeway is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

SWY

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Safeway options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Safeway Options

29.53%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

October Options

Flat

Average

November Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Safeway’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Safeway look like and more importantly, how did the markets like these numbers?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-59.09%

-94.12%

81.48%

51.39%

Revenue Growth (Y-O-Y)

1.13%

-1.56%

-0.09%

1.25%

Earnings Reaction

6.91%*

6.77%

-13.94%

14.10%

Safeway has seen mixed earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Safeway’s recent earnings announcements.

* As of this writing

P = Excellent Relative Performance Versus Peers and Sector

How has Safeway stock done relative to its peers, Kroger (NYSE:KR), Whole Foods (NASDAQ:WFM), The Fresh Market (NASDAQ:TFM), and sector?

Safeway

Kroger

Whole Foods

The Fresh Market

Sector

Year-to-Date Return

85.24%

59.30%

33.94%

7.17%

45.39%

Safeway has been a relative performance leader, year-to-date.

Conclusion

Safeway is a grocery and drug retailer operating mainly in the West and Central United States. A recent earnings report has investors excited about the company. The stock has been surging higher and is now trading near highs for the year. Over the last four quarters, earnings and revenues have been mixed, however, investors have been pleased with what they have heard during earnings announcements. Relative to its peers and sector, Safeway has been a year-to-date performance leader. Look for Safeway to continue to OUTPERFORM.

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