Sobeys Inc. $38 – Toronto symbol SBY

SOBEYS INC. $38 (Toronto symbol SBY; SI Rating: Average) is Canada’s second-largest food seller, with 1,300 stores under the Sobeys, IGA and Price Chopper banners. The company owns roughly a third of its stores; franchisees own the remaining two-thirds. The Sobey family controls 68% of the company’s stock.

Like Loblaw, Sobeys used non-food items and in-store services such as pharmacies and bakeries to drive its growth. Sales rose from $9.2 billion in 2001 (fiscal years end April 30) to $12.2 billion in 2005. Earnings before unusual items grew from $1.50 a share (total $91.2 million) in 2001 to $2.85 a share ($186.7 million) in 2005.

Also like Loblaw, Sobeys has invested heavily in new stores, and developed its own private label brand (“Compliments”). It’s also streamlining its distribution network by closing some facilities and expanding others.

Sobeys is also installing a new computerized checkout system that will cut customer waiting times, and improve inventory management. It will take five years for Sobeys to upgrade all of its stores.

In its second fiscal quarter ended November 5, 2005, Sobeys spent $4.6 million on new equipment. Consequently, earnings fell 2.8%, to $0.70 a share (total $45.8 million) from $0.72 ($47.2 million) a year earlier. But the plan increased sales 6.8%, to $3.2 billion from $3.0 billion. If you exclude the impact of new stores, sales rose 3.6%.

Sobeys recently secured a new long-term credit facility, which should cut its interest costs. Long term debt is just 0.25 times equity, so the company has plenty of room to make acquisitions. However, Sobeys will likely opt to continue its gradual expansion plan after it failed to acquire the Canadian operations of A&P stores last year.

We first recommend Sobeys at $36 in our April, 2003 issue. It fell to around $27 in 2004 but rose to $43 in September 2005. The company will probably earn $2.87 a share in its current fiscal year, and the stock trades at just 13.2 times that figure. The $0.56 dividend yields 1.5%.

Sobeys is a buy for long-term gains.

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