SuperValu: Is It Time To Go Shopping?

Today's Stock Focus is on Supervalu Inc. (SVU). According to Yahoo Finance, SVU "operates as a grocery retailer in the United States. The company operates combination stores, food stores, and limited assortment food stores. Its stores offer various grocery products, general merchandise, health and beauty care products, pharmacy products, fuel, and other items and services." According to Mergent's, SVU has increased it's dividend 35 consecutive years in a row.
The above table illustrates the perspective that I have on Supervalu Inc. (SVU) as compared to the other Dividend Achievers that are ranked by price closest to their 52-week low. As you can see (when you click on the image) SVU is the only company that is within its one-year low and selling below book value. Click on the following link to get a reasonable breakdown by message board poster GOOFERB who does a great job with an industry peer review on SVU.
The most alarming matter for SVU is the issue of the amount of long-term debt held by this company. Just to reiterate, from the Yahoo Finance message board post by GOOFERB, the debt situation is as follows:

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."

With the debt situation in mind, I have to say that when reviewing Valueline Investment Survey's report on SVU over the last 20 years I find that the company has consistently maintained a mean price-to-cashflow of 5 times. According to Valueline, SVU registered a cashflow per share of $7.59 in 2007 which implies a mean price of $37.95.

According to Valueline, the book value for SVU in 2007 was indicated to be $28.08 in 2007 and is expected to reach $30 and $32 in 2008 and 2009 respectively. Currently, Yahoo!Finance has SVU with a trailing twelve month (ttm) book value of $28.83. This implies a discount of around 9% of book value.
From a technical perspective, the stock has moved upward from an important support level of $24 back to 1999. If the $24 level holds up this stock will likely trade in a range and/or move higher. SVU must trade above $26.25 and exceed $27.55 in order to give the investor the green light in terms of going back to the $35 level.

SVU's ability to increase the dividend over the last 35 years along with its well protected dividend, due to the low payout ratio, suggests that this stock is a great opportunity with limited downside risk.

Comments

[H.J. Huneycutt:]

I like SVU right now, as well. Not only do their numbers look good (with the market overreacting to the debt load from the Albertson's acquisition), but I also like Shoppers grocery store in particular. I have shopped there rather frequently over the past few years and the prices are fairly good by grocery store standards, they are concentrated in a market where Wal-Mart and Target do not have many supercenters, many of the stores have good pharmacies, and generally, they seem to be well-run. I can't say anything about the other SVU grocery stores, but if they are remotely similar to Shoppers, I think this is a good bet.

2008 Aug 07 04:37 PM

[Egg:]

Jake, one of the reasons you stated you liked them, is one of the main reasons I dislike them.

The fact that WMT and TGT and not competing against them at full super center strength is a reason to avoid them. 'Cuz one day Wal-Mart and Target will get zoning approved for SuperCenters in their turf...and then SVU will be at a big competitive disadvantage.

Same thing with Safeway.

I would buy Kroger's, if any, of the grocers since they already largely compete with Wal-Mart and Target with a good portion of their stores.

2008 Aug 08 12:35 AM

[H.J. Huneycutt:]

Wal-Mart has had extreme difficulty expanding supercenters into the DC Metro area (which is the area I was referencing in particular). There are a few in the outer suburbs, but that's it. Target does not seem to be overly eager to jump in (with supercenters) either.

I'm also not as high on Wal-Mart as others. Rising gas prices help undermine their business model. People are going to be less willing to drive 10 miles to go to the Wal-Mart Supercenter when the Shoppers is 1 mile down the road and only marginally more expensive. Which isn't to say that Wal-Mart won't do better than some others in a recession; they are still a low-cost leader and people will go there and bulk up, but their customer base will also shrink a little bit.

In general, Wal-Mart Supercenters tend to be in outer suburban areas, which are going to be the most severely hampered by rising gas prices (a long-term trend). I think inner cities are poised for a comeback over the next few decades and Wal-Mart is not an inner city outfit. I'd be extremely surprised to see them jump into places like Arlington, VA, Takoma Park, MD or any of the inner DC 'burbs.

2008 Aug 08 06:46 AM

[ronpaul_in_...:]

The book value number is exceeded by its goodwill. SVU has negative tangible book value. It might be a decent buy, but not because of its price/book ratio. It's hard to believe there are any strong intangibles pulling anyone into an Albertson's instead of a competitor. I'm sure you'll agree if you've been in one.

2008 Aug 08 01:28 PM

[truthinvesting:]

Nice article but ask yourselfthis question.Why buy this stock when you can buy MO PFE UST RAI DOW or others that combine safety and growth and dividend.Buying Great busineses in great sectors at FAIR prices is paramount.The double digit returns on the longs on my free website are proof

2008 Aug 08 04:15 PM

[Dividend Inc:]

Thank you all for your comments on our article. All the points about negative book value, competition from WMT and TGT and alternative investment opportunities in the form of MO, PFE, UST, RAI, and DOW are definite matters to consider. However, 35 years of dividend increases indicate managment's ability to perform when many others couldn't.

On the technical side, while the stock is up 5.66% from the date of the article the anchor to this position is if the stock can stay above the $27.55 level. We are now only $0.11 cents away from that critical technical level before we can look onward and upward.

Thanks again. Touc
dividendinc.blogspot.c...

2008 Aug 13 04:00 AM

[madmike:]

Well folks, with their (SVU retail stores) high prices and offshoring to India, "they" in the long run will just continue the slide of the US economy into the toilet. With the throwing so many jobs to a country that doesn't spend a dime in the US economy, who's going to buy the goods?

Oh and by the way, no matter what the press releases say in the morning, they added another 200+ to the layoff list today....Have your say!

2008 Aug 15 12:04 AM

[H.J. Huneycutt:]

Madmike,

Are you suggesting that people will stop eating because of a poor US economy? If anything, SVU stands to benefit from a recession as less people are going to eat out or drive long distances; they're going to stock up on groceries and eat at home.

2008 Aug 15 08:06 AM