SuperValu is Undervalued - Barron's

Barron's can't understand why shares of SuperValu (SVU) have lost a third of their value since July 2007, considering the number-three U.S. supermarket chain topped FQ4 consensus estimates and continues to forecast a 13-15% EPS gain over a year ago.

• At a current $33, shares trade for just 10.5x earnings. They're also well below their normal enterprise-value-to-Ebitda multiple of 5.5%.
• 2008 sales were an all-time record, meeting its stated goal following its 2006 acquisition of Albertson's. It sees 2-3% sales growth in the coming year, and 1-2% same-store growth.
• Operating margin grew to 3.3% in Q4, up from 2.6% a year before. Net interest expense fell to $157M from $173M as it continues to pay down its debt well ahead of its stated goals.
• Its dividend yields 2%. Ongoing share buybacks can only make things better.
• SuperValu earmarked $1.3B for store remodeling. It is focused on new merchandising initiatives and promotions.
• Growth in SuperValu's supply-chain unit, which services independent retailers, is strong.

Executives concede customers are cutting back, but they still have to eat. Currently, they favor bulk items and promotional sales. Management says customer visits are down, but average tape sales are up as people try to cram more shopping into less store trips.

Dreman Value Management's Cliff Hoover likes SVU's aggressive debt repayment policy. He sees shares up 21% to $40. Cypress Capital Management's Richard Arvelund applauds management's experience and execution, and likes its out-of-favor status. He thinks shares could gain 24% to $41.

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From SuperValu's FQ4 earnings conference call:

Mark Wiltamuth - Morgan Stanley

And on the inflation front, if you look at Wal-Mart (WMT) fourth quarter numbers that would kind of imply that they are passing through costs and also attacking on a little extra margin. Do you think they are kind of raising the pricing umbrella for the grocery group right now and are you using that too narrow your gap with them?

CEO Jeffrey Noddle

...Generally increases are being passed through. I believe they are being passed through by Wal-Mart. I thought it was interesting to note that their like-store sales for March which included Easter were well under 1% and will they certainly have the same inflationary pressures throughout their business. So it continues very orderly, I don't think we have seen any particular competitor try to use the rate of inflation in holding that back as a major competitive tool. People are very promotional now, they are certainly being aggressive and a lot of marketing efforts to consumers, but we don't see anybody particularly using that strategy to impact the market.

Comments

[deaverb]

Supervalu is a giant that could unleash its power in the near future. It has been so fragmented in buying, offices everywhere. We have never been able to keep up with them as a general merchandise vendor (secondary to their objectives).

Having said that, they had the guts "not" to buy into fighting for the Kmart business--and watching their major competitor Fleming crumble, wither, and die. They bought the Albertson's mess, and it was one, and did their careful cautious consolidation (impressive list of c's).

Above all, they are first class, honest, hard working people with that culture. Open minded, not overly impressed with themselves.

So, they are a potentially great retail story as long as they don't hire "the great white hope" like HP did with Carly. Their people are first class--and can do it.

Eli notched another on the old belt. Well done. Great story; great potential; can't see any downside whatsoever. Down 33%, seems crazy as Supervalu gets better and better all the time.

[NormanLepoff, M.D.]

Very informative.

[mikeb]

supervalu bought out fleming too.supervalu is the third largest grocer wholesaler in the u.s. i know, i work there. my job is very secure.