What a difference a day makes! Nobody wanted to touch Supervalu (SVU) with a ten foot pole and now that the company has finally produced a blowout earnings report (are its turnaround efforts gaining traction?) buyers could not get enough of the shares. In their frenzy, buyers rolled over shorts, leading to a staggering 20% price hike on over 50 million shares of volume changing hands. The shares hadn’t seen a percentage gain of that caliber in a long time, and things should only get better as the year progresses.
A Deeper Look
Why did the market react so favorably considering there was a miss on revenues? (1)The fact that the company issued upbeat guidance for fiscal 2102 of $1.20 to $1.40; (2) Despite a 5% drop in sales, the company’s gross margin remained intact at 23.3% versus 23.4%; (3) The company's Save-A-Lot banner expansion is showing promise, as well as its joint venture with Rite Aid; (4) Total long term debt was reduced 9% from $7 billion to $6.35 billion, saving the company $10 million in fourth quarter interest charges, from $130 million to $120 million; (6) Its selling and administrative costs rose only 10 basis points from 20.3% to 20.4%, notable when considering the drop in sales leverage.
Although a part of SVU’s dramatic rise could be attributed to unsuspecting short sellers frantically buying to cover, the bulk of the move was definitely due to improving fundamentals. Will SVU ever get back to its May 2007 high of $47? Probably not, but it could easily see its current forward multiple of 8.87 get closer to its peer group average PE of 13.5, resulting in a $15 to $16 stock price.
- KR is on a roll. It has made several new 52 week highs and is only about a 33% jump away from its all time February 1999 high of $32. Although its stock price is only about 8% below its average median analyst target of $26, go with the trend on this one. In addition, KR sells at a very reasonable forward multiple of only 12.85 times its 2012 earnings estimates of $1.91, a fact that should makes this a top selection for your grocery basket. One other critical point: The company still believes that its shares are a bargain, as it has committed to a new $1 billion stock repurchase authorization.
- SWY is also cruising. At 14.35 times its earnings estimates of $1.73, its stock is only 8% away from a new 52 week high, but light years away from its December 2000 high of $63. The shares could start to stall, especially when considering that they are already about 10% above the average analyst target price of $23. SWY has also announced the authorization of a $1 billion stock repurchase plan. One wildcard worth mentioning, which could easily add an immediate jolt the share price, is the possibility of SWY spinning off its very profitable Blackhawk Gift Card division.
- WINN is the cheapest of the group and offers the largest potential reward (it could double on a buyout proposal). The company is slated to report its third quarter earnings on May 10th. Expectations are very low with analysts forecasting a 75% earnings decrease from 38 cents to 10 cents on a 3.6% sales drop from $1.69 billion to $1.62 billion. The third quarter is usually a stronger quarter for WINN and during last year’s third quarter, the grocer beat expectations by a whopping 52% (38 cents vs expected earnings of 25 cents) Will it happen this time around? Probably not, but with the success of the company’s fuel perks program taking hold, it should be able to put up decent numbers. My wild guess: Earnings of 14 cents on sales of $1.65 billion, and if that comes to pass, WINN shareholders could replicate a day like SVU’s just celebrated!