Sept. 25, 2012 -
PRLog -- We are initiating coverage on Safeway (SWY) with a buy and a price target of $33.00. We expect stabilization in the gross profit margin slightly below 26.5% and slight percentage improvements in operating and administrative expenses to drive larger than expected EPS over the next six quarters. Currently, Safeway is gaining unit volume, indicating sufficiently competitive price points, and the economy is showing signs of stabilization. We note the shares' current yield of 4.25% (over 100% above the S&P 500 average) and the company's real estate holdings which have a purchase cost of $8.3 billion (land and buildings only). The price target is based on 6 X 2013 EBITDA and correlates to 13 X our 2013 earnings estimate of $2.46 per share. Safeway is expected to reduce total debt by $1 billion in the next six quarters through free cash flow and the proceeds from the Blackhawk IPO. The current dividend is safe and is covered 5.3 X by 2012 mid range free cash flow.
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