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Tempting at Safeway


By David Henry

With consumer prices on the ropes, bargains abound at the grocery. The buys include Safeway (SWY) shares, says Robert Olstein of Olstein Financial Alert Fund. He's buying stock at around 19, down from a 52-week high of 43. Its price-earnings ratio of 9 is half that of the Standard & Poor's 500-stock index. Olstein especially likes the $800 million in free cash flow Safeway expects this year.

Stephen Chick of J.P. Morgan Chase, which has done investment banking for Safeway, puts the number lower, at $600 million. Still, that means Safeway's is trading at just 14 times free cash flow, lower than the 20 to 25 times of peers Kroger (KR) and Albertson's (ABS) Safeway stock is down because food sales slid 2.3% in the first quarter. And Wal-Mart Stores (WMT) is expanding in Safeway's core West Coast markets. What's more, Safeway managers messed up on an acquisition and a cost-cutting plan.

Neil Currie of UBS Warburg (UBS) has a sell rating on the stock. But Olstein praises managers for admitting and correcting their mistakes. As for Wal-Mart, it can't match Safeway's convenient locations. Sales, he says, will firm with the economy. "We think it is worth $30 a share," says Olstein. Since his fund's inception in September, 1995, it returned 14.75%, annualized, vs. 7.8% for the S&P, and has beat the market every year.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them. Gene Marcial is on vacation.


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