Does SUPERVALU Live Up to its Name?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I am one of those people who hate going to flea markets, garage sales, and thrift stores. To me one man’s trash is just that, trash. My wife on the other hand loves to go searching for the buried treasure that can sometimes be found amidst the junk. In an attempt to relate better to her deal finding ways I want to learn more about the stock market’s garage sale - Special Situation stocks. Where better to start than a company whose name boasts that they are just that? Debt laden SUPERVALU (NYSE: SVU) just might live up to its name.
One look at the financials of SUPERVALU can make you toss it back on the junk pile. Negative comparable same store sales and a huge pile of rotting debt burdening the balance sheet just doesn’t appeal to my investing eyes. However, as you start to scrub away at the exterior that’s tarnishing the company you begin to see that not everything is rusty and ruined and that there might just be something valuable underneath.
The first thing you will notice is that they are actually quite cash flow positive to the tune of over $500 million per year. This is enough cash to repay their debt burden without having to refinance until 2016 by which time they’ll take down debt from its current $6.6 billion (including capitalized leases) to about $4 billion, which should allow them to easily refinance the 2016 debt maturities. Further, the debt market is typically a leading indicator and those 2016 notes are trading at a premium above par at the moment meaning their debt investors are not worried about getting their money back when it comes due.
Knowing that their financials are completely broken, is there more value to be found in the brand? Unfortunately, what I like least about SUPERVALU is its lack of one coherent brand. While SUPERVALU is their corporate name, it’s not the brand in their portfolio that defines them. Instead they run a variety of brands such as Albertsons, Jewel-Osco, Shaw’s and their crown jewel and hidden gem, Save-A-Lot which is a hard discounter featuring prices some 40% below traditional grocery stores. Most of their brands have been acquired over the years, including their ill-fated 2006 debt saddling acquisition of Albertsons. SUPERVALU has done a really poor job managing each brand independently and has never had cash flow to properly reinvest in their stores, which has only further deteriorated the brands. To truly turn around the company I would love to see a complete brand refresh and integration plan but that’s not going to happen. What they are doing is focusing on their Save-A-Lot brand by building out new stores while shedding some of their unprofitable or non-core stores as a way of refining their brand portfolio.
There is no question that they are valued as if they are going out of business. Supermarket retail is a tough business with very low margins and lots of competition. However, when you look at SUPERVALU as compared to some of their peers they are doing remarkably well. Kroger (NYSE: KR) for instance has an operating margin of about 2.6% while Safeway (NYSE: SWY) clocks it at 2.9% and surprisingly enough SUPERVALU manages 2.7% operating margins. However, when it comes to what investors are willing to pay for their profits, Safeway nabs 14 times earnings while Kroger fetches 23 times trailing earnings. SUPERVALU is left for dead at less than 5 times earnings. Not only that but SUPERVALU pays out a 5%+ dividend more than double that of Safeway and triple Kroger’s. While the dividend is really nice and a way of rewarding current investors while they wait, it might not be a bad idea for them to eliminate that all together and use those funds to repay debt or reinvest in their aging stores.
With any special situation you are not looking for the next big thing but instead searching to buy something that’s much more valuable than its present owners realize. I simply cannot see any possibility where SUPERVALU goes bankrupt and its present equity owners or at least the market buyers are valuing the company as if that’s the only likely scenario. What I do envision is a future where SUPERVALU triple’s in value if not more. If you simply take their balance sheet rightsizing of about $500 million per year and add that to their $1.36 billion dollar market cap in three years they will have increased their equity by $1.5 billion. They will have also cut the interest expenses on that debt freeing up more cash flow for shareholders but even if they kept free cash flow stagnant, they just need an eight times cashflow multiple to triple in value in three years. Further deleveraging or being assigned a multiple to earnings of a company not left for dead and you can see what a SUPERVALU these shares are today.
The problem is that the market can always stay irrational longer than any of us can stay solvent or in this case not be frustrated owners. With SUPERVALU patience will be the key word, owners need to wait for the market to feel comfortable in the fact that that are not going bankrupt unless there is another credit crisis. There is no telling when the market will take this stock out of the discount bin but for those with a lot of patience SUPERVALU could really help you Save-A-Lot for retirement once the market realizes the are practically giving the company away.
The Motley Fool owns shares of SUPERVALU INC. latimerburned has 2013 $10 LEAP Calls on 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.
