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Value Scouter(slinj) is value investor who follows value investing school of thoughts. His investment thesis centers around 1) Net-net stock where the company trades significant below liquidation value; 2) company with lasting moat that is trading at discount to its intrinsic value based on one... More
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  • SVU - continuous top line decline? 0 comments
    Dec 24, 2010 11:35 AM | about stocks: SVU
     A slew of bloggers have written about SVU in recent weeks: (see reference section at the end of the article)
    They looked from perspective of cash flow valuation, dividend perpetuity, debt load/balance sheet safety point of view.  These interesting articles all seem to conclude an asymmetric risk/reward ratio. 

    What I was curious to know coming from a slight different angle, I was interested in the seeming continuous decline of the top line and catalyst for the turnaround.  So let's delve into that.  

    1. continuous decline of top line.
    Top line numbers for SVU has been under pressure since later part of 2008, the decline accelerated early 2010, reaching a record level of 1615, 1170 Q by Q decline for reporting period ending April, June 2010 respectively.  The decline start to slow down in the most recent quarter with a same quarterly decline of 805.  Table below outlined the comparison.  
    Now the most recent quarter bottom line number is dismal due to large non cash write down of good will/intangibles.  So why this continuous write downs?  Well, the decline in share price and market valuation is a driver, but we also know new management come in reign May 2009, and a "big bath" like this by new management team sets a very good stage for later comps.  A quick glance through the press release also shows several key recruits of the executive team over last two quarters, in line with the turnaround story.  

                Q08  Q09     Q10     Delta 08-09 Delta 10-09
    April  10387 10820 9205     -433            1615
    June 13347 12715 11545     632            1170
    Oct   10226  9461   8656      765              805
    Jan   10171  9216   955  

    2. catalyst for the turnaround
    The slow down of decline is backdropped by a few other events that could further help the turnaround story: 
    • management compensation is largely associated with stock incentives;
    • ramp up in save-a-lot segment of the business that has higher margin;
    • divest of non core asset that could further help to pay back debt and free up cash flow;
    • liquidity not a concern for the foreseeable future;
    Turnaround is never easy, it takes competent management team, support of marcoeconomic trend and most importantly, time.  When I see the numerous sell recommendation from wall street analyst and continuous decline of the share price, I get excited.  Is further decline of share price possible?  Yes.  Is SVU at current price a good value? You bet.  With all this, I am a buyer here.  

    Disclaimer:  The author has a long position in SVU at the time of the writeup.  

    References:
    http://seekingalpha.com/article/242200-supervalu-should-reward-patient-investors-with-substantial-upside?source=yahoo
    http://seekingalpha.com/article/241967-capitulation-in-supervalu?source=yahoo
    http://seekingalpha.com/article/241756-supervalu-just-like-an-lbo-but-for-retail-investors?source=yahoo



    Disclosure: I am long SVU.
    Stocks: SVU
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