On Tuesday, RBC Capital adjusted its financial outlook for Albertsons (NYSE:ACI) Companies Inc. (NYSE: ACI), reducing the grocery chain's price target to $22 from the previous $23 while keeping an Outperform rating on the stock. The adjustment comes as the analyst projects a modest increase in same-store sales for 2024, anticipating a 0.8% rise.
This expectation is based on the continued strength in the pharmacy sector, which is likely to be somewhat counterbalanced by a weaker core grocery segment, especially considering the high inflation rates the prior year.
The firm also revised its 2024 adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) forecast for Albertsons to $4.0 billion, a decrease from the earlier estimate of $4.1 billion. The change reflects a shift in the expected growth of adjusted EBITDA, which is now anticipated to occur later in the year.
This later growth is attributed to the impact of the product mix and the timing of productivity initiatives that Albertsons is expected to implement.
RBC Capital's new price target of $22 is based on a probability-weighted scenario. The firm assigns approximately a 65% likelihood to the possibility of a deal falling through, assigning a fundamental value of $20 to Albertsons' stock. This valuation is calculated using approximately 5 times the revised adjusted EBITDA for 2024, excluding a $600 million breakup fee that would be due if the deal does not materialize.
Conversely, there is about a 35% chance that the acquisition will proceed as planned. In this case, the estimated value per share would be $27.25, derived from the agreed purchase price of $34.10 minus the $6.85 special dividend to be paid out.
RBC Capital's analysis indicates that despite the lowered price target, the firm still sees positive potential in Albertsons' stock performance, maintaining an Outperform rating. The new estimates and expectations take into account the current market conditions and Albertsons' business dynamics as the company navigates through the year.
InvestingPro Insights
Albertsons Companies Inc. (NYSE: ACI) is currently trading with an attractive earnings multiple, with a P/E ratio of 9.13, which is lower than the adjusted P/E ratio for the last twelve months as of Q3 2024 at 7.83. This valuation suggests that the stock may be undervalued relative to its earnings potential. Additionally, Albertsons has demonstrated a stable revenue growth of 3.12% over the last twelve months, indicating a consistent performance in generating sales. Despite some market volatility, the company's stock has shown low price volatility, which could appeal to investors seeking a more stable investment in the Consumer Staples Distribution & Retail industry.
InvestingPro Tips highlight that Albertsons is a prominent player in its industry and analysts predict the company will remain profitable this year, having been profitable over the last twelve months. This is consistent with RBC Capital's positive outlook on the stock. However, it's worth noting that Albertsons is trading near its 52-week low, which could present a buying opportunity for investors who believe in the company's fundamentals and long-term prospects. For those looking to delve deeper, InvestingPro offers additional tips, including an analysis of the company's liquidity position, with short term obligations exceeding liquid assets, which could be an important consideration for risk assessment.
Investors interested in a comprehensive analysis of Albertsons, including more detailed InvestingPro Tips, can explore further with a subscription. Use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. With 6 more tips available on InvestingPro, investors can gain a well-rounded view of the company's financial health and potential investment opportunities.
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