SuperValu: What's Not to Love?

| About: SUPERVALU Inc. (SVU)

I had previously written why I purchased LEAPS of SuperValu (NYSE:SVU). Now I will examine why I am not overly concerned about the strike or its debt load, which, if not for the company's great return on assets, could potentially be company killing.

The company is still expanding, indicating that it isn't concerned about its debt:

Supervalu is focused on long-term retail growth through targeted store remodels and new store development in the hard-discount format. During fiscal 2011, the Company added 132 new stores through new store development and closed or sold 87 stores, including planned disposals. The Company leverages its distribution operations by providing wholesale distribution and logistics and service solutions to its independent retail customers through its Supply chain services segment.

Additionally, it recently purchased stores (here and here) at what should prove to be favorable prices. One of the more recent stores coming under the SVU umbrella was actually in my hometown, where it has a great location that it took over from a local grocer.

While the company that took it over was a franchisee of SVU, this shows one of the reasons that I love the company so much. In restaurants, franchised locations are a great way to grow and make a ton of money (just look at Applebee's (APPB) and McDonalds (NYSE:MCD)). SVU is in an area that allows it to grow, without actually growing in a way that may or may not make sense. For a company of this size, that's a competitive advantage that the likes of Kroger (NYSE:KR) doesn't have.

CEO pay is down, big time. The CEO has every incentive in the world to right this ship (which seems to be getting there, even without him). With the experience that he has, I am betting that he will do quite well. While I don't like how employees will be compensated based on stock price, this is a good thing for the near term -- especially for the options that I bought. Just because it is ultimately not the best thing for the business doesn't mean that it isn't a great incentive agreement that should help out my options.

Everyone seems to be freaking out about the pending strike in California. Frankly, if you look at the numbers, it won't be company-killing. It's in no one's interest to have a long strike. The union members need jobs; not a hair more in benefits. The company is not in a terrible position at the moment, especially from this strike.

Just take a look at the numbers. If the total amount of revenue lost (~$2 billion) for the whole industry from the last strike hits SVU (which it won't, as SVU doesn't make up nearly all of the stores), you will see company-wide revenue sink to a "paltry" $35.5 billion. Hardly company-killing.

A sale of certain assets would give the company a glut of cash -- which would be a huge catalyst for the stock price. It would even allow for company to pay less in interest, which would be interesting to see if it would offset the lost earnings at the sold stores.

Lastly, for those of you that want a nice graph or something like that: go here. Here, we see that the company's bonds are yielding less than its coupon. Never a bad sign. Plus, they're yielding in the same range as companies like Ford (NYSE:F), AT&T Broadband (NYSE:T), and a host of companies that, while not necessarily healthy, are likely not going to default anytime soon. I would imagine if the company really needed to, it could do some sort of debt offering and be fine.

As a side note, looking at a 10K from a few years ago, it seems like the company more than delivers on its promises of staying a float and reducing debt.

As with many of the things I invest in, I certainly realize that over-reliance on any one item in my thesis is a bad idea. As a whole, though, it seems likely that the company is significantly undervalued.

Disclosure: I own SVU LEAPS.