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Kroger (KR), Safeway (SWY) and Supervalu (SVU) are undervalued and have shown positive headway towards consistent profitability. They have been plagued by high commodity prices that have caused the cost of food to rise and narrowed their profit margins. Their stock price has also been beaten down, as the US continues to suffer from unemployment and housing-market woes.

It’s important to keep in mind that if the current macro-economic trends persist, these grocers will have difficulty posting good fundamentals.

Kroger manufactures, processes and retails food in the United States. Its fiscal first-quarter earnings rose 16% as a result of increased costs control and sales growth. This profit rise has been an outcome of a long initiative to keep prices low while continuously building customer loyalty. These initiatives have increased store visits and average sale per customer.

Currently, Kroger runs the most capital-intensive business out of all three retailers, with 565.12% of profits being spent on capital expenditures over the last 10 years. But it's been able to earn a generous return on shareholders’ equity (21% in 2011) and has gradually increased its positive free cash flow to 1.4B in 2011.

Current Price: $24.00

Growth Price (DCF): 36.53

Undervalued by 52.19%.

Our grade: 51.86/100. Find our full report here.

Safeway is a food and drug retailer and a network of distribution, manufacturing and food-processing facilities in North America. Safeway has been able to improve cash ROIC from 10% to 16% in the last two years, nearly five times the amount in 2001. It's also begun accepting Starbucks’ (SBX) mobile payment at nearly 1 000 of its Starbucks kiosks. This will allow it to learn from Starbucks’ mobile payment experience without risking core operations. Moreover, it's consistently delivered free cash flow while repurchasing stock and paying regularly increasing dividends from 2005.

The ability for Safeway to generate new sources of revenue consistently is key to its success. So far, it seems capable of bringing itself out of a disappointing series of years.

Current Price: $22.74

Growth Price (DCF): 35.48

Undervalued by 56.05%.

Our grade: 69.16/100. Find our full report here.

Supervalu operates under multiple grocery banners (Acme, Farm Fresh, Save-A-Lot), provides supply chain services and wholesale distribution across the United States. Supervalu’s fundamentals are less than stellar. It's earned an unimpressive net income and made a loss over the last 10 years. Moreover, Supervalu has failed to reinvest in earnings to build brands while 148.16% of profits have been spent on capital expenditures.

However, there have been moves that suggest that Supervalu will be able to widen its net profit margin and offer a more coherent service in the future. It's sought to consolidate its store brands this month under one national brand, Essential Everyday. This move signifies Supervalu’s persistent battle with the frugal consumer as the recession continues for many households. By consolidating brands, Supervalu hopes to put more attention on its private labels and boost profit margins. The successes of these efforts remain integral to Supervalu’s future profitability.

Current Price: $8.65

Growth Price (DCF): 27.28

Undervalued by 215.42%.

Our grade: 50.15/100. Find our full report here.

Source: Kroger, Safeway and Supervalu: Undervalued and Recovering