Valuing SuperValu: Favorable Comparison vs. Peers

The grocery segment melted down on Friday. The catalyst was Great Atlantic and Pacific Tea Co, (GAP) missing  earnings estimates and seeing its share price plummet 26%. The entire sector sold off in sympathy, with SuperValu (SVU) giving up 11%, Safeway (SWY) and Kroger (KR) dropping 4% and Winn Dixie (WINN) slammed 8%, I think it was another overreaction, and on Monday, cooler heads will  prevail, bringing in bargain hunters to prowl on the sector.

 

The numbers: SuperValu's shares are selling at only 9 times forward 2009 EPS estimates of $2.52  versus a 15  forward multiple for KR,  and a forward PE of 10 for SWY. SVU’s dividend yield is 2.2% or  nearly twice that of either SWY or KR . To claim this company is undervalued is an understatement, as it currently sells near book value (shareholder’s equity), while KR is priced at four times  book  and SWY  trades at 1.6  book. The company’s price to sales ratio is the lowest of its peer’s  at .15, followed by KR at .26 and SWY at .27

  

Market cap versus sales: It’s interesting to note that SVU’s market cap of $5.9 billion is about one half that of SWY’s $11.2 billion market cap, yet both companies generate similar annual revenues of about $44 billion. KR’s  annual revenues of $73 billion is the most impressive  of the group, giving it claim to a market cap of nearly $19 billion. 

 

The debt load: SVU’s long term debt is bloated due to its Albertsons acquisition. The company has pared its debt, but with long term debt topping out at about $8.8 billion, it’s significantly higher than KR’s $7.7 billion and SWY’s $6 billion. All three company's have about $250 million in cash. It's apparent that SVU's debt service is eating into the bottom line and it’s the probable reasoning behind Wall Street’s relatively low valuation of its share price.

 

Real estate owned: SVU operates 2,474 stores and 23 distribution centers. It owns the property on about 65% of those locations. SWY owns the property on only 41% of its 1,743 stores, while KR indicated in its 10K that the majority of its locations are leased. The property that SVU owns has probably appreciated substantially since it was acquired, creating hidden value within the balance sheet that could be monetized in the future.

 

Analysts' one year price targets: The number cruncher’s have pegged SVU with a $34 price target representing 25% appreciation from current levels. They have given KR a target of $33 signifying a gain of 18%. SWY leads the pack with a $36 price objective, assuming a 28% rise.

 

The bottom line: All three of these defensive equities offer nice appreciation potential with minimal risk. However, SVU’s additional risk is well worth the investment for those looking for a chance to ”hit one out of the park” without striking out.

 

Disclosure: Long

Comments

[Gregg:]

As someone in the industry - SV may seem undervalued but they have a massive consolidation that still needs to take place. Until they consolidate successfully, their buying operations to Minneaplois, it will be a quagmire.

2008 Jul 20 05:04 PM