In late November I wrote a comprehensive article on Roundy's fundamentals and business prospects. I remain bullish on the stock, even though the shares since then have continued to trade cheaply in the $5 range. I think now may be a good time to buy Roundy's (RNDY) before the early February announcement of fourth quarter results. This is because there still lingers some overly pessimistic confusion regarding Roundy's earnings per share [EPS]. This has led to some wrong conclusions, and even erroneous data feeds on the major financial websites.
For example, some "ttm" (trailing twelve months) figures are actually aggregating only 9 months of data. Because Roundy's went public during 2012, its first quarter results (as a private company) were never fed into many databases. My Ameritrade account for example, fed by Thomson Reuters, shows RNDY ttm EPS as $.85. But ttm EPS as reported by Roundy's was in fact $.96. Moreover, the more useful figure for most investors would be Adjusted EPS after backing out one-time items. This ttm Adjusted EPS is actually $1.19. (This figure makes sense vis a vis the consensus of the six analysts currently projecting EPS of $1.09 for 2013.)
Once 2012 fourth quarter results are reported in a couple weeks, fully twelve months of Roundy's data will for the first time be reflected in all databases and the opportunity to capitalize on the subdued sentiment caused by the overly depressed figures will be lost. In other words, the shares may rise since the trailing P/E ratio will fall substantially. Getting in before earnings are announced might mean benefiting from a consequent boost in the share price.
Of course the nature of fourth quarter's results will also bear on the market's reaction, but during the latest conference call on November 9th management indicated that the quarter up until that point had been good -- a definite improvement over Q3. So unless sales disappointed badly between November 10th and December 31st, the results announced in early February should be at least decent. I drive past and shop frequently at several of Roundy's supermarkets and I have not noticed any drop in the number of shoppers or cars in their parking lots. Of course that is a small anecdotal sampling and doesn't mean much, but at least what I didn't see was any obvious dearth of shoppers.
The IPO Confuses
Another cause of 'per share' statistical errors made by some pundits was the reorganization of Roundy's capital structure during its IPO of February 2012. As a result of the changed structure, any direct "per share" comparisons between pre-IPO and post IPO shares are completely meaningless. They are apples to oranges.
Prior to the IPO, a large chunk of Roundy's capital structure was in the form of preferred stock. However, the preferred dividends paid out were accounted for as an expense (interest expense) rather than paid out from earnings. They were in essence owner's earnings (for inter-year comparison purposes) but they never made it down the income statement into "Net income".
Additionally, the non-preferred portion of owners' capital -- the common shareholder stake -- was accordingly much smaller pre-IPO since the preferred interest was sizable. Also, more common stock was issued at the IPO. The much smaller pre-IPO common stakeholder interest than today creates a proportionately higher pre-IPO earnings on a 'per share' basis. Complicating and offsetting this, pre-IPO aggregate earnings would for comparison purposes be underreported by the amount of any Preferred dividends paid in a given period. All this means that any "per share" comparisons between pre IPO and post IPO periods are completely meaningless unless a host of complicated adjustments are made (including the appropriate conversion rate being applied between the pre- and post-IPO common shares, which are not equivalent). These facts have eluded many amateur analyses. For example, this Motley Fool blogger's claim that 2012 second quarter's earnings per share of $.42 versus $.58 in the prior year were "down 28% from the prior year" is completely erroneous. The shares are not the same shares. (The 2012 Q2 earnings of $18.9 million were actually up from the $17.7 million of the prior year (see table).)
Comparison clarity between pre and post IPO periods can easily be achieved by reconstructing directly from Roundy's form 10Q filings its operating results in aggregate rather than "per share." Here are the all the figures that I could glean from Roundy's 10Q's (a convenient Excel version of this table is available here):
Unusual item, net of tax
Adj Net Profit
Avg Common Shares Outstanding
All figures except EPS are in millions. unk=data not found in 10Q or period not yet reported
I use EBIT rather than EBITDA as a proxy for 'operating earnings' including depreciation expense, but before financing costs which can vary depending on the capital structure.
We see that for 2010, $46.2 million in net profit was reported on $3.767 billion in sales. For 2011, net profit was $48.1 million on $3.840 billion in sales. For the latest reported ttm, removing the one time restructuring expenses, net profit was $47.1 million on $3.878 billion in sales.
So the true picture is actually that neither sales nor adjusted earnings have declined, quite unlike what you'd expect to see given the plunging share price.
Then why the massive stock price selloffs when second and third quarter results were announced?
The only rational answer can be the declining same store sales figures. The thinking must be that same store sales are only in the very beginning stage of a much more serious decline to come, due to competition. My November article that I mentioned at the top argues in depth otherwise.
In any event, at a forward P/E of just 4.5, not a lot has to go right for buyers at the $5 level to make good money over time, while it would take quite a large and unrelenting loss of market share (or margins) for buyers at $5 to end up with a losing investment. I think it's quite an attractive risk/reward tradeoff. The $.48 annual dividend (9.2% yield) may even hold. This huge dividend yield currently amounts to only paying out 56 cents of every $100.00 in grocery sales, so its sustainability is plausible.
Disclosure: I am long RNDY.