SuperValu: Forgive the Analysts for They Know Not What They Do

Thanks to a UBS downgrade, SUPERVALU (SVU) took a 10% hit this past week, and in the process made new 52-week and five-year lows, before bouncing back more than 3%, aided by the buying help of bargain hunters and short covering. UBS trimmed its 2009 earnings estimates about 14%, from $3.00 to 2.60 and slashed its one year price target at twice the rate of its earnings cut, from $36 to $26. When it rains, it pours. To add insult to injury this occurred just after Jefferies and Company's coverage initiation last week, with an underperform rating. I expect sooner than later both these analysts will come out of their stupor and reevaluate SVU's prospects based on more "realistic" levels.

Guidance reduction: Management reduced 2009 full year guidance a mere 1.5% from $3.25 to $3.20 based on a slowdown of consumer spending. Wall Street overreacted despite SVU soundly beating first quarter earnings estimates and pounded the shares southward to appetizing levels. Management knows the routine, "Under promise, in order to over deliver" and their conservative guidance solidifies this premise.

First quarter earnings: Top line was trimmed from $10.4 billion to $10.3 billion, partially due to store closings. Despite, an almost 1% drop in sales, earnings improved 10% from $0.69 to $0.76 due to a $33 million reduction in interest expense, a 10 basis point drop in SG&A costs and a 2 million share decrease in shares outstanding. The company's supply chain services segment, which provides product to independent grocery retailers, grew 90 basis points from 21.6% of sales to 22.5%. This segment traditionally carries a lower margin, and as a result, negatively impacted the grocer's gross margin by 20 basis points from 23.2% to 23%.

Forward PE versus its peers: SVU is in a class of itself with respect to valuation. The company is now selling at only 7.7 times 2009 estimates versus Safeway's (SWY) 10.5 and Kroger's (KR) 14.7 2009 forward multiples. Its dividend yield of 2.8% is more than twice SWY's and KR's 1.30% payout rate. The company also owns the real estate on approx. 1,600 of its 2,500 locations, while KR leases most of its locations and SWY owns the real estate on about 40% of its sites. SWY's relatively meager valuation also makes it a nice candidate for a "safe way" to put some money to work.

Shareholder equity: As I stated in my previous piece, the company's book value is close to its current share price , while SWY is selling at 1.6 times book and KR selling at 4 times book. It's important to note that SVU's book is comprised of a tremendous amount of goodwill due to its Albertson's acquisition, and if you subtract this out, its book value is essentially negated.

Institutional interest: The funds appear to like SVU. Wellington Management is the company's largest share holder with an 8.3% ownership stake. Barclay's Global, FMR LLC, Goldman Sachs and State Street Corporation all each own more than 5%, and have been steadily in an accumulation phase.

The bottom line: The shares are too cheap, and eventually the market will realize that fact and price them at more realistic levels. The main culprit contributing to the stock's low valuation is its long term debt, which is 14% higher than KR and 46% higher than SWY, however, too much negative emphasis is being placed on this, as SVU is expected to trim an additional $400 million debt off its balance sheet in fiscal 2009. The softness in the economy is beneficial to the grocery segment, as consumers are inclined to purchase more groceries to compensate for eating out less often. This defensive stock offers ample appreciation potential with minimal downside risk and should be actively accumulated by patient value players.

Disclosure: Long SVU, SWY and KR

Comments

[retailwatcher:]

What concerns me is the same store sales issue SVU has. I've also watched a couple of their banners get beaten pretty badly over the past couple of years in their respective regions - these were banners that were leaders before the takeover by ABS and then SVU. Retail prices are too high and foottraffic is consistantly down.

2008 Aug 25 09:55 AM