5 Reasons Supervalu is a Value Trap, not a Value Play

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In a column in Barron's by Michael Stanoli earlier this year, "Buy Stocks Slowly as Prices Fall," JPMorgan Analyst Ken Goldman stated that Supervalu (NYSE: SVU), the grocery store chain, had an asset value for the stock near $11."

Supervalu is now trading for around $2.40 a share.

This plunge in price has resulted in valuations that have Supervalu appearing to be the dream stock for value investing.  The price-to-sales ratio is just 0.01.  The forward price-to-earnings ratio is only 3.77.  But there are five factors why Supervalu is a nightmarish value trap rather than a dreamed about value play.

The first is that Supervalu is losing money.  Competition from Wal-Mart (NYSE: WMT), Target, Costco and The Kroger Store (NYSE: KR) have decimated the stock.  Supervalu has a negative profit margin of 3.02%.  For Supervalu, the net income per employee is $8,245.00.

Compounding the problems from the money losing operation is a huge accumulation of debt.  The debt-to-equity ratio for Supervalu is 98.25.  According to investing legend Peter Lynch, the average debt-to-equity ratio is about 0.25.  Too much debt is toxic for a company.  About this, Dan Caplinger of The Motley Fool stated, "At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt."

As the chart below reveals, this a huge distraction for Supervalu as it has a much higher debt-to-equity ratio than The Kroger Co., whose is larger than those for Wal-Mart, Target and Costco.

SVU Debt to Equity Ratio data by YCharts

 

The negative profit position and staggering debt encumbrance does not appear to be changing anytime soon for Supervalu as both earnings-per-share growth and sales growth are falling.   On a quarterly basis, earnings-per-share growth is off by 44.85% for Supervalu.  Over the past five years, it has plunged by 21.41%.  The future does not look any more promising as earnings-per-share growth is projected to fall by 7.25% next year and than 5% for the next five years for Supervalu.  It is the same bearish trend for sales growth, too.  Not a whole lot of value to be unlocked based on those two critical indicators.

Supervalu also lags behind the industry standard in many areas.  The five-year industry average sales growth rate is 4.59%.  For Supervalu, it is a negative 4.67%.  The average return-on-investment for the industry is 6.90%; with it being a negative 17% for Supervalu.  And while Supervalu loses more than $8000 per employee, the industry average is a net income of $4032.00 for each worker.

In addition to the gloomy outlook for SuperValu, there is a dismal future for the traditional grocery store industry.  Department stores offering groceries such as Wal-Mart, Target and Costco have destroyed the traditional grocery store.  Wal-Mart started selling groceries in 1988 and now controls about one-third of the market, far more than any other.  Drug stores such as Walgreen and discount entities such as Dollar General and Family Dollar Store are also carving out slices of the grocery store product.

The appealing valuations for Supervalu are a function of the collapse of the share price, not an inefficient pricing of the company by the market.  For 2012, SuperValu is off by 69.38%.  For the last quarter of market action, the share price has fallen by 53.47%.  There is little reason to expect Supervalu to recover, and many for why it will not.

 


 

Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Supervalu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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