I don't want to rehash much of what has been written on SuperValu (SVU), as there has been plenty. For an excellent overview, see Frank Voisin's article here. To sum up at the beginning, it is not time to back up the truck. For a few reasons I will point out, I just can't do that here. That being said, I believe that SVU is a great long-term investment, and has a chance to experience significant price appreciation in the future.
Why, you might ask? Because as a wise investor (Mohnish Pabrai) once said,
When there is a high degree of uncertainty but low risk, there is the opportunity to make a lot of money.
SVU operates grocery stores under multiple brands, including Acme, Albertsons, Bristol Farms, Shaws, and a few more. SVU also operates a deep discount format, Save-A-Lot. SVU also has a wholesale distribution segment (to both internal and external clients), which contributes approximately 20% of revenues but is less profitable than the grocery segment.
- P/E: N/A
- P/S: 0.04
- P/FCF: 1.9
- P/OE: 1.65
I don't have to tell you that this is really cheap, do I?
Because of the high level of indebtedness, let's look at EV multiples as well:
- EV/FCF: 10.5
- EV/OE: 9.0
Yup, still looks cheap to me. Bonus: As has been pointed out elsewhere, as SVU pays down its debt, if its enterprise value is to stay constant, the increases will accrue to market capitalization. So if SVU pays down $1.5 billion in debt, the stock price could double.
How Do Margins Stack Up?
In looking at SVU, I wanted to compare it to its competitors to see how its margins and inventory measure up. Because margins are low, inventory turns are very important for grocers (Joe Ponzio of FWallStreet explains the "true" margin better than I ever could). Here's how SVU stacks up. (Note: I adjusted net margin for goodwill impairments, which most of these companies had.):
|Ticker||Inventory Turns |
|Net Margin||"True" Margin|
As you can see, SVU's inventory turns are very good, third overall. The inventory turns appear to be coming at the expense of margins, though, as its margins are lower than the others; SVU's "true" margin lags. So SVU is clearly not in the same league as Whole Foods (WFMI). Of course I would love to own WFMI, but it's not trading for less than 2x free cash flow.
SVU's margins are good (speaking in absolute terms), but lag relatively. I see this as a reason to be a bit more cautious in my investment, but it by no means deters me. With SVU's level of indebtedness, a very high true operating margin would be a great thing to have, but their current one will do. Besides, there is reason to believe that margins will improve in the future, as discussed further below.
How About Those Goodwill Impairments?
In one of my early investing mistakes, I bought some shares of Safeway (SWY). In hindsight, one of the warning signs I saw, but dismissed too easily, was the persistent goodwill impairments. Astute observers will note that SVU has had a few in recent years as well. However, the SVU impairments are due to a depressed stock price, something the company can't really do much about. The other kind of goodwill impairment, the kind SWY had, is the "oops, we paid too much for this mess" impairment.
Simply put, a company purchases another only to realize that the acquiree is not nearly as good as was thought. The goodwill stemming from this acquisition is then impaired. Impairments of this type are much more worrisome, and SWY had all sorts of these. SVU's impairments don't bother me.
But They Have a Lot of Debt...
True, but also they have a long time to pay it off; some of the debt isn't due for twenty years. The revolving credit facility is due in 2015, which would be a big year in terms of debt payment, but I find it hard to believe that SVU won't seek to refinance this. And as long as they remain in compliance with their debt covenants, I don't see why they wouldn't be able to refinance. Other than in 2016 ($1 billion), none of the yearly debt maturities is over $750 million.
As Frank discusses in his article, the former head of Wal-Mart Americas, Craig Herkert, became CEO of SVU in 2009. Mr. Herkert has placed a significant emphasis on streamlining SVU's non-revenue producing workforce, reducing SG&A, and leveraging SVU's buying power to obtain better prices on inventory. He has a proven track record of success (something you can't say of all executives) and I will be looking for Mr. Herkert to be delivering on this in the years to come.
Insider ownership is ok, around 3%. This is certainly not high by any means, but it shows that management has a meaningful interest in making sure SVU succeeds. One thing I would love to see more of, and frankly, am surprised not to see, is insider purchases. With the stock this cheap, I would love to see management doubling down and buying up bargain shares left and right. The fact that I don't see this is certainly not a reason to pass, but I took it into consideration when deciding how much to invest.
As has been observed, Wal-Mart's offerings of groceries has begun to impact margins at traditional grocers. I think this is something of a risk, but as mentioned above, SVU has their own designs on using their purchasing power to get better prices on merchandise. They will probably never have the purchasing power of WMT, but I think this will mitigate things somewhat. And let's face it, it's not like grocers are going to all disappear because of WMT. Of the advantages traditional grocers have over WMT, I count diversity of offerings, quality, and proximity (in my opinion).
Also, if the debt repayments fall off track, or free cash flow starts to decline, I will sell, and will probably lose a lot of money. Bankruptcy is a distinct (though remote) possibility here, which helps to explain the bargain valuation. Throwing off lots of cash is key to the SVU thesis, and their debt load requires it.
Last is lawsuits. There were many lawsuits inherited by SVU from Albertsons, which have been resolved. But SVU itself is not immune to lawsuits, and there are a couple outstanding at the moment. I don't really consider this an issue at this point, but it could become one if these things keep happening.
The Bottom Line
So the bottom line is that SVU is in a bit of a bind with their debt, but they are producing plenty of cash to meet these obligations. I think the market is paying too much attention to the goodwill writedowns and corresponding losses, and the remote possibility of bankruptcy, and forgetting that we are talking about a strong company that throws off plenty of cash every year.
SVU has a great CEO, straight from one of the world's most admired (and despised) companies, who are putting an emphasis on cost cutting, something I can definitely get behind.
With low risk and high uncertainty, now is the time to buy SVU.