J.P. Morgan Reiterates Neutral Rating on Safeway (SWY)

J.P. Morgan is out with a research report this morning, where it reiterates its Neutral rating on Safeway SWY ahead of earnings; it has a $22.00 price target on the stock. The JPM analysts said, “Safeway will report 2Q10 results on July 22nd (BMO). Into the print, we are modeling EPS of $0.36 – $0.02 below the Street. We continue to avoid the stock, despite its recent pullback, largely because we view the company’s 2010 EPS guidance as too optimistic. Along these lines, SWY’s $1.65-$1.85 EPS outlook implies roughly 12% growth at the midpoint on IDs of 0-1.0%. However, year-to-date, we estimate IDs of negative 2.4% (1Q actual & 2Q JPM estimate), which suggests second-half ID sales will need to improve ~500 bps in order for Safeway to hit its guidance. As a result, we are modeling FY10 EPS of $1.60 versus the Street at $1.70. All told, while valuation looks reasonable – trading at 11.4x our 2011E EPS – the stock looks like it could be a value trap to us; hence, we remain Neutral.” They added, “Into the print (earnings), we are modeling operating EPS of $0.36 – which is $0.02 below the Street. We point out that our forecast represents a 36.4% year-over-year EPS decline, or a 29.6% drop on a 2-year stacked basis, which is roughly in line with the trailing-3-quarter stacked average decline of 31.7%.” The J.P. Morgan analysts also said, “At this juncture, we think Safeway’s top-line recovery continues to be an uphill battle and believe the company experienced ongoing soft sales trends throughout 2Q. As a result, we are modeling an ID sales (ex. fuel) decline of 1.6%, but note there could be an additional 50-100 bps of downside to our estimate given soft traffic trends based on our recent store checks. On a 2-year stacked basis, the implied 3.8% ID decline is in line with the 1Q rate, but still 50 bps off the trailing-3-quarter average. All in, despite a recent step-up in advertising (e.g., TV, radio, and print), we think IDs (ex. fuel) are likely to remain under duress and the company’s 2010 ID forecast of 0.0%-1.0% will prove too aggressive.”